Intermediate Chapter 7 Notes
Intermediate Chapter 7 Notes 3310
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This 4 page Class Notes was uploaded by Emily Sears on Wednesday January 27, 2016. The Class Notes belongs to 3310 at Auburn University taught by Dr. Duane Brandon in Spring 2016. Since its upload, it has received 16 views. For similar materials see Intermediate Accounting I in Accounting at Auburn University.
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Date Created: 01/27/16
CHAPTER 7: Inventories- Measurement & Flow Assumptions Definition Inventories are classified as current assets and consist of: 1. Goods held for sale to customers in the ordinary course of business 2. Goods in the process of production for sale 3. Goods held for use in the production of goods or services to be made available for sale Inventory Classification Retail Company Merchandise inventory Manufacturing Company Raw materials inventory Work-in-process inventory Finished goods inventory Service Company Unbilled services provided Reporting Inventory in the Financial Statements Manufacturing Companies Step1- decide what items are included in the inventory and count the physical inventory quantities Step2- Determine the cost of the units it purchased or produced during the accounting period Step3- Use a cost flow assumption to allocate the costs of the beginning inventory plus the units purchased or produced during the year between the ending inventory and the cost of goods sold Inventory Systems Periodic inventory systems Under a periodic system, the quality of inventory on hand is determined only periodically through a physical count. COGS is a residual amount that is dependent upon the physical count of the ending inventory COGS = Beg. Inventory + Purchases (net) – End Inventory Perpetual inventory systems Under a perpetual system, a continuous record of inventory and COGS is maintained in the inventory account. That is, all purchases and sales of goods are recorded as they occur Note: a physical inventory count is performed periodically for control purposes Computation of Net Purchases: Purchases + Freight-in - Purchases Returns and Allowances - Purchases Discounts Taken = Net Purchases Inventory Quantities What should be included on the balance sheet as inventory? The basic criterion is economic control rather than physical possession or legal ownership Whose inventory is it? General Rule- Inventory is buyer’s when received, except: FOB shipping point – Buyer’s at time of delivery to common carrier Consignment goods – Seller’s (consignor’s), not buyer’s (consignee’s) Product financing arrangements – Seller’s, not buyer’s (where ‘buyer’ is a financing company) Bill-and-hold sale – Buyer’s, only if goods are properly segregated from seller’s inventory Purchase obligations – Seller’s not buyers What about items in transit? FOB shipping point- included in inventory of buyer FOB Destination- included in inventory of seller Inventory Costs The cost of purchased inventory should include the purchase price (net of purchase discounts) plus payments directly associated with inventory, such as: Freight-in Receiving Unpacking Inspecting Storage Insurance Applicable taxes (property, sales taxes Note: Interest incurred from the financing of inventory purchases generally is not included in the cost of inventory (unless manufactured over an extended period of time) The cost of manufactured inventory should include direct and indirect costs incurred in the production activity, such as: Direct costs- raw materials, direct labor Indirect costs- manufacturing overhead Note: As inventory enters the production process, the related inventory costs are transferred to a work- in-process account. Upon completion of the production process, the related costs are transferred to a finished goods account Purchase Discounts Gross price method A company records the purchase at the gross price, and records the amount of the discount in the accounting system in the purchases discounts account (which reduces the inventory account on the B/S only if the discount is taken Net price method A company records the purchase at its net price, and records the amount of the discount in the accounting system in the Purchases Discounts Lost account (which is classified as an Other Expense on the I/S) only if the discount is not taken See Example 7.1 Inventory Cost Flow Assumptions A major management decision in accounting for inventories is selecting a method for assigning inventory costs to the income statement account Cost of Goods Sold Common cost-flow assumptions include: The specific identification method The first-in, first-out method (FIFO) The average cost method The last-in, first-out method (LIFO) It is NOT necessary that these cost-flow assumptions replicate the actual physical flow of inventory sold. Actual physical flows often follow FIFO in manufacturing firms These methods can be applied using a periodic or perpetual inventory system Ending inventory and COGS under perpetual and periodic FIFO are identical Dollar-Value LIFO follows the LIFO cost flow assumptions that overcomes many of the problems associated with simple LIFO LIFO- conformity rule requires book-tax conformity LIFO liquidation profits must be disclosed LIFO reserves must be disclosed A change to LIFO is treated as a change in accounting estimate (no retrospective adjustment) Notes No Dollar-Value LIFO