chapter 8 inventory reporting
Download
Skip this Video
Download Presentation
Chapter 8 Inventory Reporting

Loading in 2 Seconds...

play fullscreen
1 / 26

Chapter 8 Inventory Reporting - PowerPoint PPT Presentation


  • 74 Views
  • Uploaded on

Chapter 8 Inventory Reporting. Physical units to be accounted for: What is there AND Goods in transit (FOB Destination) Goods on consignment with consignee Goods sold under buy back agreements Goods sold with high rates of return (if unable to estimate returns)

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 8 Inventory Reporting' - oshin


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 8 inventory reporting
Chapter 8Inventory Reporting
  • Physical units to be accounted for:
    • What is there AND
    • Goods in transit (FOB Destination)
    • Goods on consignment with consignee
    • Goods sold under buy back agreements
    • Goods sold with high rates of return (if unable to estimate returns)
    • Installment sales (if unable to estimate bad debts)
  • Report inventory units at the lower of cost or market (conservatism). What is included in cost for:

- Retail

- Manufacturing:

slide2
Purchases are debited to Inventory account

Freight-in, Purch. Returns & Allowances and Purch. Disc. are recorded in Inventory account.

Debit COGS and credit Inventory account for each sale.

Purchases are debited to Purchases account.

Freight-in, Purch. R & A and Purch. Disc. are recorded in their respective accounts.

COGS is computed only periodically:

COGA – EI = COGS

Inventory Systems

Perpetual Method

Periodic Method

inventory system perpetual
Inventory System - Perpetual

Purchase of Inventory:

Dr. Inventory 1,000

Cr. A/P, Cash, etc. 1,000

Sale of Inventory:

Dr. Cost of Goods Sold 1,000

Cr. Inventory 1,000

Dr. Cash, A/R, etc. 1,500

Cr. Sales Revenue 1,500

At Year-End: no j/e required, unless errors are found in inventory count

inventory system periodic
Inventory System - Periodic
  • Purchases are debited to Purchases account.
  • Freight-in, Purchase Returns & Allowances and Purchase Discounts are recorded in their respective accounts.
  • COGS is computed only periodically: COGA – EI = COGS

J/E, Periodic System:

Purchase of Inventory:

Dr. Purchases 1,000

Cr. A/P, Cash, etc. 1,000

Sale of Inventory:

Dr. Cash, A/R, etc. 1,500

Cr. Sales Revenue 1,500

At Year-End:

Dr. Ending Inventory (determined by count) 38,000

Dr. Cost of Sales (plug) 283,000

Cr. Purchases 286,000

Cr. Opening Inventory (carried forward from prior year) 35,000

slide5

Effect of Inventory Errors

Error in Effect on Effect on

Ending Income Balance sheet

Inventory Items Items

Under- COGS (over) Inventory (under)

stated Net income (under) Retained Earn (under)

Over- COGS (under) Inventory (over)

stated Net income (over) Retained Earn (over)

slide7

Cost Flow Assumptions

Cost flow assumptions need not be consistent with physical flow of goods. The objective is to most clearly reflect periodic income.

The cost flow assumptions are:

  • Specific identification
  • Average cost
  • First-in, first-out (FIFO) and
  • Last-in, first-out (LIFO) (prohibited under IFRS)
slide8

Cost Flow Assumptions: Example

Spaworld reports the following transactions for 2004 (assume no opening inventory):

Date Purchases Purchase Cost

May 12 100 units $1,000

Aug 14 200 units 2,200

Sep 18 120 units1,800

420 units $5,000

On December 31, the company had 20 units on hand and uses the periodic inventory system.

What are the cost of goods sold and the cost of ending inventory?

slide9

Average Cost Method

Date Purchases Cost

May 12 100 units $1,000

Aug 14 200 units $2,200

Sep 18 120 units$1,800

420 units $5,000

  • Steps:
  • Calculate per unit average cost:
  • Apply this per unit average cost to units sold to get COGS:
  • Apply the per unit average cost to units remaining in inventory to determine Ending inventory:
slide11

GAFS

$5,000

COGS

EI

First-In, First-Out (FIFO) Method

Given data:

Date Purchases Cost

May 12 100 units @ $10 $1,000

Aug 14 200 units @ $11 $2,200

Sep 18 120 units @ $15 $1,800

420 $5,000

Cost of goods sold (FIFO)

“Count” from one direction and “plug” the other

Note: FIFO = LISH (Last In Still Here)

slide12

GAFS

$5,000

COGS

EI

Last-In, First-Out (LIFO) Method

Cost of goods sold (LIFO)

Given data:

Date Purchases Cost

May 12 100 units @ $10 $1,000

Aug 14 200 units @ $11 $2,200

Sep 18 120 units @ $15 $1,800

420 $5,000

LIFO = FISH (First In Still Here)

slide13

Cost Flow Assumptions: Notes

  • The ending inventory in units is the same in all three methods: the cost is different
  • The cost of goods available is the same for all methods
  • The cost of goods sold and the cost of ending inventory are different
  • In periods of rising prices, LIFO would result in the smallest reported net income.
slide14

Advantages of LIFO Method

  • LIFO matches more recent costs with current revenues.
  • With increasing prices:
    • LIFO yields the lowest taxable income (assuming inventory does not decrease).
    • Under LIFO, there is less need to write down inventory down to market
slide15

Disadvantages of LIFO Method

  • LIFO yields the lowest net income and therefore reduced earnings (with increasing prices)
  • Under LIFO, the ending inventory is understated relative to current costs
  • LIFO liquidation (reduction of quantities of inventory during a period – results in “costing” items at older prices):
    • May result in income that is detrimental from a tax view
    • May cause poor buying habits (because of the layer liquidation problem)
  • LIFO Conformity Rule: if you use LIFO for tax purposes, you must use it for financial reporting also.
periodic vs perpetual
Periodic vs. Perpetual
  • FIFO: COGS and EI numbers are exactly the same under either periodic or perpetual systems
  • BUT – LIFO, Weighted Average will give you different numbers
    • Under perpetual LIFO, with each sale, you cut into only existing layers (so you must stop and calculate the cost of goods sold at each sale)
    • Under perpetual Weighted Average (more accurately, Moving Average), you stop and calculate a new average cost for every sale
slide19

LIFO Reserve

LIFO Reserve (Allowance) account is used, when:

LIFO is used for external reporting and a non-LIFO basis is used for internal reporting.

SEC reporting requirements – disclose the difference between LIFO and current cost of inventory reported on the Balance Sheet

slide20

Dr. Cost of goods sold $30,000

Cr. Allowance to Reduce Inventory

to LIFO $30,000

LIFO Reserve: Example

Jeppo Inc reports the following balances:

Inventory (FIFO basis) on Dec 31, 2004: $50,000

Inventory (LIFO basis) on Dec 31, 2004: $20,000

Adjust the cost of ending inventory to the LIFO basis

Balance Sheet (Assets):

Inventory (FIFO) $50,000

less: Allowance to Reduce Inventory ($30,000)

Inventory (LIFO) basis $20,000

slide21

LIFO Layers

  • Under the LIFO approach, a business may build up layers of inventory from prior periods. A layer liquidation occurs, when:
    • Earlier costs are matched against current sales due to a reduction of quantities of inventory during a period (results in “costing” items at older prices)
    • Such matching results in distorted income.
slide22

Dollar Value LIFO

  • Dollar value LIFO applies LIFO procedures to pools of similar goods based on dollars rather than units
  • Used for external purposes (i.e., financial statements and taxes)
  • Advantages over regular LIFO:
    • Reduces record keeping (maximum of one layer per year).
    • Mitigates likelihood of eroding old layers (some decreases in goods in the pool are offset by increases in other goods in the pool).
  • Price index – a measure of the change in prices from a base year (the year dollar value LIFO is adopted in this case) to the current year
    • Internal = Ending inventory quantities X current year costs

Ending inventory quantities X base year costs

    • External – calculated by the Bureau of Labor Statistics
slide23

Dollar Value LIFO Calculation Steps

Compare ending inventory at base year prices to beginning of year inventory, also at base year prices – if there is an increase – we add a new LIFO layer at CY prices:

  • Calculate EI at current year costs - FIFO
  • Calculate current year price index.
  • Calculate EI at base year costs - FIFO
  • Calculate the change in inventory at base year costs – FIFO (this represents the quantity change in base year prices)
  • Calculate the EI at dollar value LIFO:
    • If the change in inventory at base year FIFO is positive, add a layer to BI at current year cost (i.e. price this real dollar quantity increase at current prices)
    • If the change in inventory at base year FIFO is zero, BI equals EI
    • If the change in inventory at base year FIFO is negative, peel off layer(s) from BI
slide24

Dollar Value LIFO: Example

Given:

Base layer (Dec 31, 2003): $20,000

Inventory (current prices)

Dec 31, 2004: $26,400

Prices increased 20% during 2004.

Determine dollar value LIFO at Dec 31,2004

slide25

At base $:

$22,000

$26,400 / 1.20

At EOY prices:

$26,400

Dollar value

LIFO Inventory

Net increase

at base $:

Restate at

current $:

$2,400

(layer added)

$20,000

plus

$2,400 =

$22,400

$22,000 less

$20,000

$2,000 * 1.20

Dollar Value LIFO: Example

Price increase, 20%

Dec 31, 2003

Dec 31, 2004

slide26

Dollar Value LIFO: Notes

When the ending inventory (at base year prices) is less than the beginning inventory (at base year prices) (i.e. in the example above if EI at base year prices was < $20,000):

  • the decrease must be subtracted from the most recently added layer.
  • Once a layer is eliminated (peeled off), it cannot be rebuilt.
ad