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Chapter 5 Reporting and Analyzing Inventories

by: Jessica Copenhaver

Chapter 5 Reporting and Analyzing Inventories ACCT 2101 A

Marketplace > University of Georgia > Accounting > ACCT 2101 A > Chapter 5 Reporting and Analyzing Inventories
Jessica Copenhaver
GPA 4.0
Principles of Accounting
Swati Bhandakar

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About this Document

Both a detailed outline of Chapter 5 as well as in class notes are included in this weeks bundle.
Principles of Accounting
Swati Bhandakar
Class Notes
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This 15 page Class Notes was uploaded by Jessica Copenhaver on Sunday September 27, 2015. The Class Notes belongs to ACCT 2101 A at University of Georgia taught by Swati Bhandakar in Summer 2015. Since its upload, it has received 558 views. For similar materials see Principles of Accounting in Accounting at University of Georgia.


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Date Created: 09/27/15
Chapter 5 Reporting and Analyzing Inventories Merchandise lnventory all the goods that a company owns and holds for sale regardless of where they are located Goods in Transit o FOB shipping point purchaser responsible for transit ownership passed to buyer when the goods are on the vehicle 0 FOB Destination seller responsible for transit ownership passed to buyer when goods have arrived at their destination Goods on Consignment consignor owner continues to own consigned goods shipped to a consignee and reports them in its inventory until sold Goods DamagedUnsold if damaged goods can be sold they are included in inventory at their net realizable value sales price cost of making the sale Invoice Cost Discount incidental costs Incidental Costs import tariffs freight storage insurance and costs incurred in an aging process 0 Materiality Constraint costtobene t constraint avoid assigning some incidental costs of acquiring MI by saying the effort in assigning theses costs outweighs the bene t 0 Expense them to Cost of Goods Sold instead Inventor Costing under a Perpetual System 0 when each item in inventory can be identi ed with a speci c purchase and invoice 0 Practical only for companies with expensive custom made inventory 0 assumes that inventory items are sold in the order acquired o Earliest units acquired are charges to cost of goods sold while costs from most recent purchases are charged in ending inventory 0 most recent purchases sold rst and charged to the cost of goods sold on the income statement while the cost of the earliest purchases are assigned to ending inventory 0 Closest to matching current costs of goods sold with revenues 0 Cost ow in accounting need not match the physical ow 0 weighted average cost per unit of inventory at the time of each sale 0 WA cost of goods available for saleunits available Purchase Costs Regularly FIFO assigns lowest to COGS highest gross pro t amp net income LIFO assigns highest to COGS lowest gross pro t amp net income 0 Tax advantage by postponing payment of some income tax Weighted Average yields between results 0 Speci c Identi cation yields results that depend on which units are sold Side Note a company must disclose the inventory method it uses in nancial statements Consistency Concept prescribes that a company use the same accounting method period after period so that nancial statements are comparable Valuing Inventory at LCM amp Effects of Inventory Errors Accounting principles require that inventory be reported at the market valuecost of replacing inventory when the market value is lower than the cost 0 Lower of cost or market LCM o Decline in replacement cost loss of value in inventory LCM applied to Individual Items comparisons items inventory must be adjusted downward when the market is less than the cost 0 Debit to COGS and Credit to Ml Conservatism constraint prescribes the use of the less optimistic amount when more than one estimate of the amount to be received or paid exists and these estimates are equally likely cannot be adjusted up Financial Statement Effects of Inventory Errors Ending COGS Year 1 Net Income COGS Year 2 Net Income Inventory Y1 Y2 Understated Overstated Understated Understated Overstated Overstated Understated Overstated Overstated Understated Ending Inventory Assets Equity Understated Understated Understated Overstated Overstated Overstated Errors in Beginning Inventory do not yield misstatements in the end of period balance sheet but they do effect the current period income statement i Mama mg Said K u gt uquot n quotHquot 1 V J a 1 Vi quot I V W r a a n v u 39 h39 1quot r l 39LJEI1 II u L l a a ll IL a l J Damaged 01 Qbsalete gmdg are 1m crammed in invemmy if thy cannot be S ld Jr If these can be gold sh Cost she d be reducad to Statei gilt i 39 IV 2395 V a 3quot 39 r IV39 can le i quot I n a u 7 39 gt 39 3 m u l 5r are I m a my Finanaial Statement Eff t m f Casting i Methds l Enjjng quot Better matches appmimmg curmnt mats in cast mfmnt f gmds said wi 39 Erie Emma 39 quotEVHE Sir b Hm 39 Huang chit quot 3 I i fa H a i it l VE t fy Casting Under a PEIpBTiU l System mnventuryr r I sat5 sakes 1w a quot mm Saki n g A flaw


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