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s is used to illustrate the issue in ussed in light of the matching rule for nventory methods (and the lower-of-the-ial SpAveFIFLIFOst methodon method BasIcveno o oingtequsationiereatiaaIndvinanrc FINA100InvenTthraccoun-ir-meaiesvrulolise.beviowmuriandlcact Stephen Ching The question is how to allocate the LHS. There are four acceptable methods. ed to illustrate and compare the four methods. FINA100BasicTEheuaaiinaEcIBEntOggeiuCeCsorfSCtodsumToefRolSwtinheetaopcem 8–35 Inventory Data – June 30 Inventory Methods Purchauneurc1che5t$o1.0@isia5$e0o0rsa18050210nits Illustrative Data for the Four Periodic Copyright © Houghton Mifflin Company. All rights reserved. s sold in the accounting of the specific items in the inventory at t flow” the samethod, we augment the inventory data cost of the specific item FINA1001SpecifItiIaeninfiiatiomMethetdodnd treats “cosdcmnttica.tioStephen Ching 8–37 Illustrated Inventory Data – June 30 Specific Identification Method June 1 6IventursPchchabefor 5l00 Ass50m10iauaromeftuntt3eeiuneevJnpocy25aiurcha Copyright © Houghton Mifflin Company. All rights reserved. 8–38 (cont’d) Costrsfloods available $625 y can raise or lower Notice that the companlower- or higher-cost items Periodic Inventory System – Specific Identification Method 50 units @ $1.001.40 $ 50 98 Specific IThetbeicost assigned to the inventory wCopyright © Houghton Mifflin Company. All rights reserved. and is illustrated by the method, one needs to keep give a proper measure of net income in the original cost of every item in the to consider the following two questions: of inventory in balance sheet? clearly tedious and costly. FINA1001SpeciTiooriiivenTort).uestiraisooisohinegsestic.iivpniityeivalueethiowing slide. $1.25 = Cost unitUnit $625 500 = Average Sale × forSale $275 = forInventory Available $1.25 @ Ending Avainable Goods units Inventory Data – June 30 of Units Uni=s0 Cost = = CostCfstoeg30vin Cost Inventory Unit Average-Cost Method Illustrated PurchPuPchchen@nis$1.sa5t01@is5funsEnding1.00 50$500 unitsunits Average generally, is it a ive, tion method? Or moreo implement. to answer these questions? FINA100Avera The-aIs tobetirveatoeyemsotcei?odsidefida Stephen Ching al cost of the oldest items in the in the the Inventory Data as follows. assumes that COGS is the total originl origin FINA100FIFOF IsLIFOLori.venort. methods can be illustratedStephen Ching 8–42 Thisuchasethtemssitendiyinventory Inventory Data – June 30 the first , FIFO Method Illustrated Peri70 units @ $1.30 from purchase of June 20ut Method 150 units @ $1.40 from purchase of June 25 Costosfstofg30vnienlt units1 In61P2trSaOls hand0, June 30515unus50$un00001$220 units80 Uniterhpfstiemeetoedassumed to be Copyright © Houghton Mifflin Company. All rights reserved. 8–45 Thteeasnseheieailvettuchased Inventory Data – June 30 the last , LIFO Method Illustrated Periodic Inventory System – Last-In, First-Out Method 505u12022unitnts $t.2osoomf purchase of June 13 CoLstofstode30visla units1 In61PGtrSaOles h28d, June 305ni510tni@$tni@011$220 units80 Unitthefrrtiemedardassumed to be Copyright © Houghton Mifflin Company. All rights reserved. byle. (Recall that accounting appropriate costs against revenues.” nventories is the proper determination of using the following matching rule: the same accounting perspective? ty cost is better measuredru FINA100Match IiFIFAuceou“AincojoTottecughttheacctoestortfoirihingephen Ching days required to sell indicates the number of g an accounting period. indicates the number of times a company’s average FINA100Finan ciieRtnrynyuinsothe iAeneoryeonchanv.nvontoryetnodandould65g nt. The example and their . Their argument has two steps. COGS in current year. Step 2 links up nning inventory and COGS in the next pp.337-340 three slides. Let’s review them first. to illustrate the argume p.339 EndCOnGiCinntSrinnveatar1in Year 2 FINA100FinanNcPaditatemee“t issaymssnts” fromuseenramopleprodStephen Chingext $6,000 Gross mtaxes $ 46,0$0 Gross mtaxes $ 40,000$ 8,000 Income before income Income before income Ending Inventory Overstated by $6,000 Ending Inventory Stated Correctly at $10,000 Gross margin EndCost Infgomodsbesfo Cost of Goods Sold for the YeBegintiotEndinCginvofgoryds sold00000,16,0$e Statement for the Year BeNgntnogtEndiCgontengtryds sold00070010,$60,000 Operating expenses006 Effects of Misstatements Illustrated Gross margins $ 34,000 Gross mataxes $ 40,00$ 8,000 Income before income Income before income Ending Inventory Understated by $6,000 Ending Inventory Stated Correctly at $10,000 GroInssomaerbenfore income taxes und EndCost of goods sold Cost of Goods Sold for the YeBeNgntifstnvlooocyaveailable $108,0000,0000$e Statement for the Year BeNgntnogtEndingontefntryds sold8,000010,0000,000 Operating expenses006 Effects of Misstatements Illustrated 8–3 Year 2 esent as useful a figure as BeCgintnfgiodsotaryoverrtaeedrtdnunderttxed years is the same but the Year 1 Accounting Period to the Next misstacemmpanty holatnt Effects of Misstatements from Onencomeesaateddemreaaedesthe two on net income for a period and the Copyright © Houghton Mifflin Company. All rights reserved. th them inventory necessarily imply an imply an a LIFO company facing an increasing the first question now? Does an understatement of endingsgmehysar FINA100FinanLcitlstosyoIeaquestons:snPw?nwhethfrouostllhave notienCitry to use have a higher net a LIFO firm will ce, the choice of inventory method will e same inventoventory method will affect all financial the purchase price is rising. Balancotsetatmeenfctfsholowholders’ equity (Why?) FINA100Finan cieltaxatuthortAgnanysilly requires thxaenple,f inStephen Ching . LIFO avoided because it LIFO liquidation liquidation should be BaIncoemshstttmoent. How? FINA100LIFOIn Lthussacionn, NP also mentions a concept calledaStephen Ching requires that whperiod and inflate net income in the conservative. Ending inventory will be cost, the inventory is writtimportant is that a financial analystthe item-by- restate the income statement. lower-of-cost-or-market (LCM) rule FINA100LCMThe coslowfeNvenrorynerlwpnroydeip’oregwaCOeG.BotwmStephen Ching 180 1,350 or Market $1.702.60 4.5$300 250 800 Per Unit Lower of Cost $1.502.50 4.00 Quantity Cost Market Table 1CateIemryItmsCarMgoIIm200hoIemt-heIowmer o $750 LooerMafketst $780 $2,170 2,170 $750 Per Unit Total Quantity Cost Market Cost Market Table 2. Lower of Cost oMategotemtIMvsjooryattt020Mwetrof0os0tor m4r50.100 $340 . An alternative . Under the perpetual hase) to (EI + COGS) is made at everyory system, the two systems is given at the end.ems. periodic inventory system issue when the previous analysis is repeated under perpetual inventory system FINA100Perpe thelabovenaoarySsssseunder themofis(dtauiPudcneifiStephen Ching 8–53 amounts have been added Inventory Data – June 30 Inventory Methods Thspemicdalaidatedas Illustrative Data for the Three Perpetuallasentoru0ntnis0@5 Copyright © Houghton Mifflin Company. All rights reserved. 8–55 the balance, or $282.70 Inventory Data – June 30 Thbesummoestheec Average-Cost Method The ending inventory is Rounded PurahascSale1anch13ri3ane5.15nu(7nit1t$10@$502so0ld00 $ 50.00 Copyright © Houghton Mifflin Company. All rights reserved. 8–57 inventory system stem – FIFO Method st of goods sold are the same as y of the last items purchased y periodic FIFO Method Perpetual Inventor Thiusndeilblwthysyo JuneSas1$$1P1urhrur315$050238$1n@)osni.u30o()$9o.001..00 $ 50.00 Notthose computed under the FIFOnd co Copyright © Houghton Mifflin Company. All rights reserved. 8–58 e June 13 purchase, and 40 units LIFO Method Perpetual Inventory System – LIFO Method Jur6Sa01$1nPurchchasl5$$30@(nisiCni.ntfNoiteveratorh,eelunieg20n050.00 Copyright © Houghton Mifflin Company. All rights reserved. 8–59 Perpetual Inventory System Income Statement and Balance Sheet Using Summary of Cost Flow Assumptions’ Impact on Copyright © Houghton Mifflin Company. All rights reserved. 8–48 Periodic Inventory System Income Statement and Balance Sheet Using Summary of Cost Flow Assumptions’ Impact on Copyright © Houghton Mifflin Company. All rights reserved.