Inventories - InventoriesandCGS RCJChapter9 KeyIssues 1. 2....

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Inventories and CGS RCJ Chapter 9
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Paul Zarowin 2 Key Issues 1. Effect of LIFO on financial statements  2. LIFO layers 3. LIFO reserve 4. Change in LIFO reserve 5. Price vs. quantity effects 6. LIFO and earnings management 7. LIFO footnote 8. LIFO tax savings 9. LIFO   FIFO switch 10. Dollar Value LIFO 
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Paul Zarowin 3 Cost Flow Assumptions BI + Pur = Cost of Goods Available for Sale GAAP does not require specific identification of the  cost of each unit sold to its acquired cost. Allocation of the “Cost of Goods Available for Sale”  between EI and CGS based on assumptions like  FIFO & LIFO. Cost of Goods Sold (CGS) Ending Inventory (EI) +
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Paul Zarowin 4 Illustrative Example Use of FIFO vs. LIFO makes a difference when  prices change.   Beginning inventory: 200 units @ $10/unit = $2,000 Quarter Purchases Units Unit cost Purchases Dollars Unit cost Purchases Dollars 1 100 10 $ 1,000 $ 11 $ 1,100 $ 2 150 10 $ 1,500 $ 12 $ 1,800 $ 3 150 10 $ 1,500 $ 13 $ 1,950 $ 4 100 10 $ 1,000 $ 14 $ 1,400 $ 500 5,000 $ 6,250 $ Units sold: 100 units per quarter, or in total 400 units Ending inventory: 300 units Scenario 1: Stable Prices Scenario 2: Rising Prices
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Paul Zarowin 5 Illustrative Example (cont’d) 200 @ 10 $ = $2,000 100 @ 14 $ = $1,400 100 @ 11 $ = $1,100 150 @ 13 $ = $1,950 100 @ 12 $ = $1,200 50 @ 12 $ = $600 400 $4,300 300 $3,950 100 @ 14 $ = $1,400 200 @ 10 $ = $2,000 150 @ 13 $ = $1,950 100 @ 11 $ = $1,100 150 @ 12 $ = $1,800 400 $5,150 300 $3,100 A. FIFO The 400 units sold (CGS) are assumed to carry the earliest costs incurred and the 300 units left in inventory carry that latest costs. CoGS Ending inventory B. LIFO The 400 units sold (CGS) are assumed to carry the latest costs incurred and the 300 units left in inventory carry that earliest costs.
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Inventories - InventoriesandCGS RCJChapter9 KeyIssues 1. 2....

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