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ACCT 2000 Chapters 5

# ACCT 2000 Chapters 5 - Chapter 5 Current Assets Current...

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Chapter 5 Current Assets Current Assets - (within 30 days) - Cash - Temporary Investments - Accounts Receivable - Inventories - Prepaid Expenses- AJEs Inventory - the merchandise that you have on hand to sell (unsold goods) Problem: 1/1/06 20 units @ \$5.00/unit 3/7/06 100 units @ \$6.00/unit 7/8/06 200 units @ \$7.00/unit 10/15/06 180 units @ \$8.00/unit 500 units available for sale 400 units acutely sold in 2006 12/31/06 100 units unsold 12/31/06 Balance Sheet Inventory \$???? How do we know what 100 units are left over at what price? How do we decide what cost to report on balance sheet? Inventory Cost Flow Assumptions GAAP accepted methods 1. FIFO- First-In-First-Out - First goods purchased are assumed to be the first ones sold - FIFO Estimated Inventory (EI) Cost = Most Recent Cost - Physical Flow Cost Flow - 43% of businesses use this method. - Most popular among businesses Ex. Left over 100 units are assumed to be priced at \$8.00/unit because lest set bought at that price. The first 400 sold is what was first bought. 100 X \$8.00 = \$800 Inventory Reported on Balance Sheet

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2. LIFO- Last-In-First-Out - LIFO EI = Earliest Purchases - 34% of businesses use this method Ex. We sold all units bought on 10/15, 7/8, and 20 units bought on 3/7. 80 units bought on 3/7 and all 20 units bought on 1/1 are unsold. 80 X \$6.00 + 20 X \$5.00 = \$580 Inventory Reported on Balance Sheet FIFO EI= \$800 LIFO EI= \$580 When Prices are rising FIFO EI > LIFO EI FIFO NI < LIFO NI (Net Income) Problem with FIFO is that FIFO income tax is > LIFO income tax LIFO income tax is lower because the NI is smaller (IF PRICES ARE DECREASENG THEN THE OPPOSITE IS TRUE) 3. Average Cost - 15% of all businesses use this method - 2 steps
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