54 Cost Flow Assumptions US GAAP vs IFRS US GAAP IFRS Inventory Cost Flow

54 cost flow assumptions us gaap vs ifrs us gaap ifrs

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54 Cost Flow Assumptions: U.S. GAAP vs. IFRS U.S. GAAP IFRS Inventory Cost Flow Assumptions LIFO is an acceptable inventory valuation method Does not permit the use of LIFO
55 Inventory Management Inventory levels are closely monitored to: Ensure that the inventories needed to sustain operations are available Hold the cost of ordering and carrying inventories to the lowest possible level Conflicts: Companies must maintain sufficient quantities of inventory to meet customer demand Maintaining inventory is costly Tools used to balance these conflicting objectives Computerized inventory control systems Outsourcing of inventory component production Just-in-time (JIT) system
56 Inventory Management: Just-in-time (JIT) System Raw materials Advantages: Relatively low inventory balances are maintained Customer demand is quickly met Example: Dell Inc. A personal computer is not manufactured by Dell until an order is placed Many of the components used in the production are acquired by Dell until an order is placed Manufacturer Supplier Production process Coordinates production
57 Inventory Management: Ratios (1/2) Gross profit (gross margin) ratio: Percentage of each sales dollar available to cover expenses other than cost of goods sold and to provide a profit Higher the ratio, higher the markup achieved Declining ratio might indicate that: The company is unable to offset rising costs with corresponding increases in selling price, or Sales prices are declining without a commensurate reduction in costs
58 Inventory Management: Ratios (2/2) Inventory turnover ratio: Shows the number of times the average inventory balance is sold during a reporting period The higher the ratio, the more profitable a company will be Declining ratio is unfavorable for companies Caused by: Presence of obsolete or slow-moving products Poor marketing and sales efforts
59 Methods of Simplifying LIFO Limitations of LIFO: Recordkeeping costs of unit LIFO can be significant: When a company has numerous individual units of inventory When unit costs change often during a period Probability of LIFO inventory layers being liquidated Techniques to Simplify LIFO LIFO inventory pools Dollar-value LIFO method
60 Methods of Simplifying LIFO: LIFO Inventory Pools (1/3) Grouping inventory units into pools based on physical similarities of the individual units Within pools, all purchases during a period are considered to have been made at the same time and at the same cost Individual unit costs are converted to an average cost for the pool If the quantity of ending inventory for the pool increases: Ending inventory Beginning inventory Single layer added during the period at the avg. cost of the pool
61 Methods of Simplifying LIFO: LIFO Inventory Pools (2/3) Diamond Lumber Company has a rough-cut lumber inventory pool that includes three types: oak, pine, and maple. The beginning inventory consisted of the following: Quantity (Board Feet) Cost (Per Foot) Total Cost Oak Pine Maple 16,000 10,000 14,000 $2.20