Fall 2007 Lecture 11 inventory continued and financial analysis of AR AND INVENTORY

Fall 2007 Lecture 11 inventory continued and financial analysis of AR AND INVENTORY

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    ACCT-101 Lecture 11     Inventory continued and  make financial decisions  based on A/R and Inventory
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    Outline Review of the consequences of different inventory  methods Principles: Lower-of-cost-or-market rule (LCM) Adjusting from LIFO to FIFO Ratio analysis Discussion of home work problems
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    Graphical comparisons of the  assumptions of the flow
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    Income Effect I When inventory costs are increasing LIFO cost of goods sold is  highest , net income is  lowest   and tax advantaged. FIFO cost of goods sold is  lowest , net income is  highest   and tax disadvantaged. Average cost method is somewhere in between.
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    Income and Tax effect II When inventory costs are decreasing FIFO cost of goods sold is  highest  and net income is  lowest.  LIFO cost of goods sold is  lowest  and net income is  highest. FIFO has tax advantage when inventory costs are  decreasing
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    Additional information to make comparison  possible (in the footnote) LIFO reserve: the cumulative difference  between  ending balance under LIFO and what ending  inventory would be at FIFO at the end of each  period.
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    Comparing firms with LIFO and FIFO Exxon Mobil: LIFO  British Petroleum: FIFO
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    Exxon Mobil (XOM) for Year 2005 under LIFO Reported number for 2005 LIFO LIFO  reserve for 2004 LIFO  reserve for 2005 $9.8 billion   $15.4  billion Inventory  $ 9.3  billion Cost of GOODS SOLD $213  billion
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    British Petroleum (BP) FIFO (BP) Inventory  $ 19 billion Cost of GOODS SOLD $ 188 billion
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    Method: converting LIFO to FIFO Exxon Mobil:     Inventory = ending inventory under LIFO + LIFO  Reserve  = $9.3billion + $15.4 billion     = $24.7billion (if reported under FIFO)     Cost of Goods Sold = COGS under LIFO – change in  LIFO Reserve    = $213 billion – ($15.4 billion - $9.8 billion)  = $207.4 billion ( if reported under FIFO)
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    British Petroleum (BP) LIFO (XOM) FIFO (XOM) FIFO (BP) Inventory  $9.3 billion => $24.7 billion $ 19 billion Cost of GOODS  SOLD $213 billion => $207.4 billion $ 188 billion
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