Before taxes 2470 2070 1670 income tax expense 140

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Unformatted text preview: t and tax effects of each LO of the inventory cost flow assumptions. of Financial Statement and Tax Effects Financial Statement and Tax Effects In Period of Rising Prices, LIFO Reports: FIFO Average LIFO $9,000 $9,000 $9,000 6,200 6,600 7,000 2,800 2,400 2,000 330 330 330 Income before taxes 2,470 2,070 1,670 Income tax expense 140 120 110 Net income $2,330 $1,950 $1,560 Inventory balance $5,800 $5,400 $5,000 Sales Highest Cost of goods sold Gross profit Admin. & selling expense Lowest 6-30 LO 3 Explain the financial statement and tax effects of each LO of the inventory cost flow assumptions. of Inventory Cost Flow Assumptions Inventory Cost Flow Assumptions Review Question The cost flow method that often parallels the actual physical flow of merchandise is the: a. FIFO method. b. LIFO method. c. average cost method. d. gross profit method. 6-31 LO 3 Explain the financial statement and tax effects of each LO of the inventory cost flow assumptions. of Inventory Cost Flow Assumptions Inventory Cost Flow Assumptions Review Question In a period of inflation, the cost flow method that results in the lowest income taxes is the: a. FIFO method. b. LIFO method. c. average cost method. d. gross profit method. 6-32 LO 3 Explain the financial statement and tax effects of each LO of the inventory cost flow assumptions. of 6-33 Inventory Costing Inventory Costing Using Cost Flow Methods Consistently Method should be used consistently, enhances comparability. Although consistency is preferred, a company may change its inventory costing method. Illustration 6-14 Disclosure of change in cost flow method 6-34 LO 3 Explain the financial statement and tax effects of each LO of the inventory cost flow assumptions. of Inventory Costing Inventory Costing Lower-of-Cost-or-Market When the value of inventory is lower than its cost Market value = Replacement Cost 6-35 Companies can “write down” the inventory to its market value in the period in which the price decline occurs. Example of conservatism. SO 4 Explain the lower-of-cost-or-market SO basis of accounting for inventories. basis Inventory Costing Inventory Costing Lower-of-Cost-or-Market Illustration: Assume that Ken Tuckie TV has the following lines of merchandise with costs and market values as indicated. Illustration 6-15 6-36 SO 4 Explain the lower-of-cost-or-market SO basis of accounting for inventories. basis Analysis of Inventory Analysis of Inventory Inventory management is a double-edged sword 1. High Inventory Levels - may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage). 2. Low Inventory Levels – may lead to stockouts and lost sales. 6-37 SO 5 Compute and interpret the inventory turnover ratio. Analysis of Inventory Analysis of Inventory Inventory Turnover Ratio Illustration 6-16 6-38 SO 5 Compute and interpret the inventory turnover ratio. Analysis of Inventory Analysis of Inventory Illustration: Data available for Wal-Mart. Illustration 6-16 6-39 SO 5...
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