Base LIFO Year Current Inventory Date Cost Year Cost Layer 1/1/200 $90,000 $90,000 $90,000 2000 Layer 20,000 30,000 21,818 [Note 1] 110,000 120,000 111,818 El at 12/31/00 2001 Layer 40,000 80,000 53,333 [Note 2] $150,000 $200,000 $165,151 El at 12/31/01 [Note 1] Price Index $120,000/$110,000 = 1.09 LIFO Layer $20,000 x 1.09 = $21,818 [Note 2] Price Index $200,000/$150,000 = 1.33 Answer "c" LIFO Layer $40,000 x 1.33 = $53,333 Current cost / bases costs = price index Price index * ending inventory = ending inventory value How do you calculate LIFO periodic = Ending inventory in units x oldest cost Gross Profit method – (1-gross profit percentage) = COGS %; COGS % * Sales = COGS - can only be used for interim financial statements as part of a periodic inventory system Conventional Retail method – take physical inventory count and price goods at lower of cost or market 3
FAR - Notes Chapter 4 FIFO Retail method – ending inventory comes from the current period purchases, including markup and markdowns Firm purchase commitment – legally enforceable agreement to purchase a specified amount of goods some time in the future Beg inv + purchases + freight in – COGS = end inv understatement of beginning inventory creates an understatement of cost of goods. overstatement of ending inventory creates a understatement of cost of goods sold Applying the lower of cost or market rule separately to "each item" results in the lowest inventory amount. Ceiling, net realizable value (finished selling price - further processing costs) XX Replacement cost XX Floor, NRV less profit (NRV ceiling - (Gross Margin % * finished selling price) XX Market (Floor) Cost (FIFO) given Lower of cost or market choose Compare "floor" with "ceiling" and "replacement cost" (use middle amount) compare that middle amount with "cost." Use lower of the two Fixed Assets • Improvements and replacement are capitalized - increase useful life, increase operational efficiency • Ordinary expenses should be expensed as repair and maintenance • Extraordinary repairs should be capitalized Land purchased to construct a building; all costs incurred to clear land for the new building are land costs - draining of swamps, brokers commission, legal fees, costs of tearing down old building, levelling, title guarantee insurance Land improvements should be capitalized - fences, water systems, sidewalks, paving, landscaping, lighting Interest costs during construction should be added to cost of land improvement based on weighted avg of acc dep Capitalized interest costs for a particular period are determined by applying an interest rate to the average amount of accumulated expenditures for the qualifying asset (known as avoidable interest Rule 1 : Only capitalize interest on the money actually spent, not the total amount borrowed - borrow 100, spend 50 on the building, only capitalize interest on the 50 Rule 2 : The amount of capitalized interest in the lower of - Actual interest costs incurred, or - Computed capitalized interest (avoidable interest) F4-38 example Disclose in F/S 1. Total interest cost incurred during the period 2. Capitalized interest cost for the period
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