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Unformatted text preview: C H A P T E R 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH This IFRS Supplement provides expanded discussions of accounting guidance under International Financial Reporting Standards (IFRS) for the topics in Intermediate Accounting. The discussions are organized according to the chapters in Intermediate Accounting (13 th or 14 th Editions) and therefore can be used to supplement the U.S. GAAP requirements as presented in the textbook. Assignment material is provided for each sup- plement chapter, which can be used to assess and reinforce student understanding of IFRS. WHICH COST FLOW ASSUMPTION TO ADOPT? During any given fiscal period, companies typically purchase merchandise at several different prices. If a company prices inventories at cost and it made numerous purchases at different unit costs, which cost price should it use? Conceptually, a specific identifi- cation of the given items sold and unsold seems optimal. Therefore, the IASB requires use of the specific identification method in cases where inventories are not ordinarily interchangeable or for goods and services produced or segregated for specific proj- ects . For example, an inventory of single-family homes is a good candidate for use of the specific identification method. Unfortunately, for most companies, the specific iden- tification method is not practicable. Only in situations where inventory turnover is low, unit price is high, or inventory quantities are small are the specific identification crite- ria met. In other cases, the cost of inventory should be measured using one of two cost flow assumptions: (1) first-in, first-out (FIFO) or (2) average cost.  To illustrate these cost flow methods, assume that Call-Mart Inc. had the follow- ing transactions in its first month of operations. Date Purchases Sold or Issued Balance March 2 2,000 @ $4.00 2,000 units March 15 6,000 @ $4.40 8,000 units March 19 4,000 units 4,000 units March 30 2,000 @ $4.75 6,000 units From this information, Call-Mart computes the ending inventory of 6,000 units and the cost of goods available for sale (beginning inventory 1 purchases) of $43,900 [(2,000 @ $4.00) 1 (6,000 @ $4.40) 1 (2,000 @ $4.75)]. The question is, which price or prices should it assign to the 6,000 units of ending inventory? The answer depends on which cost flow assumption it uses. Specific Identification Specific identification calls for identifying each item sold and each item in inventory. A company includes in cost of goods sold the costs of the specific items sold. It includes in inventory the costs of the specific items on hand. This method may be used only in instances where it is practical to separate physically the different purchases made. As a result, most companies only use this method when handling a relatively small num- ber of costly, easily distinguishable items. In the retail trade, this includes some types of jewelry, fur coats, automobiles, and some furniture. In manufacturing, it includes special orders and many products manufactured under a job cost system.special orders and many products manufactured under a job cost system....
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This note was uploaded on 02/02/2012 for the course ACCO 3350 taught by Professor Alvarez during the Spring '11 term at American International.
- Spring '11