Chap005wildtextbook(1)

All purchases and sales are made on credit the

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All purchases and sales are made on credit. The selling price of inventory was as follows: 8/25 $130 5-24
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Financial Statement Effects of Costing Methods Because prices change, inventory methods nearly always assign different cost amounts. Specific Identification FIFO LIFO Weighted Average Sales 2,600 $ 2,600 $ 2,600 $ 2,600 $ Cost of goods sold 2,000 1,970 2,045 2,000 Gross profit 600 $ 630 $ 555 $ 600 $ Operating expenses 450 450 450 450 Income before taxes 150 $ 180 $ 105 $ 150 $ Income tax expense (30%) 45 54 32 45 Net income 105 $ 126 $ 74 $ 105 $ Balance sheet inventory 500 $ 530 $ 455 $ 500 $ Trekking Company For Month Ended August 31 5-25
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Financial Statement Effects of Costing Methods Advantages of Methods Smoothes out price changes. Better matches current costs in cost of goods sold with revenues. Ending inventory approximates current replacement cost. First-In, First-Out Weighted Average Last-In, First-Out 5-26
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Tax Effects of Costing Methods The Internal Revenue Service (IRS) identifies several acceptable methods for inventory costing for reporting taxable income. If LIFO is used for tax purposes , the IRS requires it be used in financial statements. 5-27
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Consistency in Using Costing Methods The consistency concept requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. 5-28
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Lower of Cost or Market Inventory must be reported at market value when market is lower than cost. Can be applied three ways: (1) separately to each individual item. (2) to major categories of assets. (3) to the whole inventory. Defined as current replacement cost (not sales price). Consistent with the conservatism principle. 5-29
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Financial Statement Effects of Inventory Errors Inventory Error Cost of Goods Sold Net Income Understate ending inventory Overstated Understated Understate beginning inventory Understated Overstated Overstate ending inventory Understated Overstated Overstate beginning inventory Overstated Understated Income Statement Effects 5-30
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Financial Statement Effects of Inventory Errors Inventory Error Assets Equity Understate ending inventory Understated Understated Overstate ending inventory Overstated Overstated Balance Sheet Effects 5-31
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Inventory Turnover Shows how many times a company turns over its inventory during a period. Indicator of how well management is controlling the amount of inventory available . Average inventory = (Beg. Inv. + End Inv.) ÷ 2 Inventory turnover = Cost of goods sold Average inventory 5-32
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