Bài giảng Fundamental Financial Accounting Concepts - Chapter 5: Accounting for Inventories

Chapter FiveAccounting for InventoriesMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinSpecific IdentificationWhen a company’s inventory consists of many high-priced, low-turnover goods the record keeping necessary to use specific identification is more practical.5-*First-in, First-outThe first-in, first-out cost flow method requires that the cost of the items purchased first be assigned to Cost of Goods Sold.FIFO5-*Last-in, First-outThe last-in, first-out cost flow method requires that the cost of the items purchased last be assigned to Cost of Goods Sold.LIFO5-*Weighted AverageThe weighted average cost flow method assigns the average cost of the items available to Cost of Goods Sold.5-*Physical FlowOur discussions about inventory cost flow methods pertain to the flow of costs through the accounting records, not the actual physical flow of goods.Cost flows can be done on a different basis than physical flow.5-*Effect of Cost Flow on Income StatementThe cost flow method a company uses can significantly affect the gross margin reported in the income statement.5-*Effect of Cost Flow on Balance SheetSince total product costs are allocated between costs of goods sold and ending inventory, the cost flow method used affects its balance sheet as well.5-*Inventory Cost Flow Under a Perpetual SystemFirst-in, First-Out (FIFO)Last-in, First-Out (LIFO)Weighted AverageSold 43 bikes for $350 each5-*First-in, First-out Inventory Cost Flow5-*Last-in, First-out Inventory Cost Flow5-*Weighted Average Inventory Cost FlowTotal CostTotal Number=$12,65055= $230 5-*Comparative Financial Statements and the Impact of Income Taxes 5-*Lower of Cost or Market (LCM)Inventory must be reported at lower of cost or market.Applied three ways:separately to each individual item.to major classes or categories of assets.(3) to the whole inventory.Market is defined as current replacement cost (not sales price).Consistent withthe conservatismprinciple.5-*5-*If Ending Inventory is overstated then Cost of Goods Sold will be understated.5-*If Cost of Goods Sold is understated, then Gross Margin is overstated.Resulting in overstatement of Net Income.5-*Then, on the balance sheet Inventory is overstated and Retained Earnings is overstated.5-*Calculate the expected gross margin ratio using prior period’s income statement.Multiply the expected gross margin ratio by the current period’s sales to estimate the amount of gross margin.Subtract the estimated gross margin from sales to estimate cost of goods sold.Subtract the estimated cost of goods sold from the amount of goods available for sale to estimate the ending inventory.The Gross Margin Method5-*Inventory TurnoverCost of Goods SoldInventoryThis measures how quickly a companysells its merchandise inventory.This is the first step in calculating the average number of days to sell inventory.5-*Average Number of Days to Sell Inventory365Inventory TurnoverThis measures how many days, on average, it takes to sell inventory.Other things being equal, the company with the lower average number of days to sell inventory is doing better.5-*End of Chapter Five5-*