Financial Accounting Financial Accounting IFRS 4th Edition Chapter 1 Accounting in Action Weygandt ● Kimmel ● Kieso Chapter Preview Good decision making depends on good information Whatever your pursu.
Financial Accounting IFRS 4th Edition Weygandt ● Kimmel ● Kieso Chapter Accounting in Action Chapter Preview Good decision-making depends on good information Whatever your pursuits or occupation, the need for financial information is inescapable You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing financial information Good decision-making depends on good information Chapter Outline Learning Objective Identify the activities and users associated with accounting LO Accounting Activities and Users Three Activities Accounting consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users Note: The accounting process includes the bookkeeping function Bookkeeping involves only the recording step LO Accounting Activities and Users Internal Users LO Accounting Activities and Users External Users (1/2) LO Accounting Activities and Users External Users (2/2) Taxing authorities: Does the company comply with the tax laws? Regulatory agencies: Is the company operating within prescribed rules? Labor unions: Does the company have the ability to pay increased wages and benefits to union members? Customers: Does the company continue to honor product warranties and support its product lines? LO DO IT! Basic Concepts ACTION PLAN •Review the basic concepts discussed •Develop an understanding of the key terms used LO Learning Objective Explain the building blocks of accounting: ethics, principles, and assumptions LO 10 Click to edit Master title style Gross Profit Method A method of estimating the cost of ending inventory by applying a gross profit rate to net sales Step 1: Net Sales Step 2: Cost of Goods Available for Sale - Estimated Gross Profit - Estimated Cost of Goods Sold = Estimated Cost of Goods Sold = Estimated Cost of Ending Inventory 406 Click to edit Master title style Illustration: Kishwaukee Company records show net sales of $200,000, beginning inventory $40,000, and cost of goods purchased $120,000 In the preceding year, the company realized a 30% gross profit rate It expects to earn the same rate this year Compute the estimated cost of the ending inventory at January 31 under the gross profit method 407 Click to edit Master title style Illustration: Compute the estimated cost of the ending inventory at January 31 under the gross profit method Step 1: Net sales Less: Estimated gross profit (30% × $200,000) Estimated cost of goods sold $200,000 60,000 $140,000 Step 2: Beginning inventory Cost of goods purchased Cost of goods available for sale Less: Estimated cost of goods sold Estimated cost of ending inventory $ 40,000 120,000 160,000 140,000 $ 20,000 408 Click to edit Master title style • Retail companies establish a relationship between cost and sales price • Applies cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost Inventory = Ending at Retail Step 1: Goods Available for Sale at Retail - Step 2: Goods Available for Sale at Cost Available = ÷ Goods for Sale at Retail Step 3: Ending Inventory at Retail x Net Sales Cost-toRetail Ratio Cost-toRetail Ratio Cost of = Estimated Ending Inventory 409 Click to edit Master title style Illustration: It is not necessary to take a physical inventory to determine the estimated cost of goods on hand Beginning inventory Goods purchased Goods available for sale Less: Net sales Step (1) Ending inventory at retail = At Cost $14,000 61,000 $75,000 At Retail $ 21,500 78,500 100,000 70,000 $ 30,000 Step (2) Cost-to-retail ratio = $75,000 ÷ $100,000 = 75% Step (3) Estimated cost of ending inventory = $30,000 x 75% = $22,500 410 Appendix: Learning Objective Apply the LIFO Inventory Costing Method 411 Click to edit Master title style Last-In, First-Out (LIFO) • Costs of latest goods purchased are first to be recognized in determining cost of goods sold • Seldom coincides with actual physical flow of merchandise • Exceptions include goods stored in piles, such as coal or hay 412 Click to edit Master title style COST OF GOODS AVAILABLE FOR SALE Date Jan Apr 15 Aug 24 Nov 27 Explanation Beginning inventory Purchase Purchase Purchase Total STEP 1: ENDING INVENTORY Date Jan Apr 15 Aug 24 Total Units 100 200 150 450 Unit Cost HK$10 11 12 Total Cost HK$1,000 2,200 1,800 HK$5,000 Units 100 200 300 400 1,000 Unit Cost HK$10 11 12 13 Total Cost $1,000 2,200 3,600 5,200 HK$12,000 STEP 2: COST OF GOODS SOLD Cost of goods available for sale HK$12,000 Less : Ending inventory 5,000 Cost of goods sold HK$ 7,000 413 Appendix: Learning Objective Compare the Accounting for Inventories Under IFRS and U.S GAAP 414 Click to edit Master title style Key Points Similarities •The definitions for inventory are essentially similar under GAAP and IFRS Both define inventory as assets held-for-sale in the ordinary course of business, in the process of production for sale (work in process), or to be consumed in the production of goods or services (e.g., raw materials) •Who owns the goods—goods in transit or consigned goods—as well as the costs to include in inventory are essentially accounted for the same under IFRS and GAAP •Except for LIFO under GAAP, both IFRS and GAAP use the lower-of-costor-net realizable value for inventory valuation 415 Click to edit Master title style Key Points Differences •Both GAAP and IFRS permit specific identification where appropriate IFRS actually requires that the specific identification method be used where the inventory items are not interchangeable (i.e., can be specifically identified) If the inventory items are not specifically identifiable, a cost flow assumption is used GAAP does not specify situations in which specific identification must be used •A major difference between IFRS and GAAP relates to the LIFO cost flow assumption GAAP permits the use of LIFO for inventory valuation IFRS prohibits its use FIFO and average-cost are the only two acceptable cost flow assumptions permitted under IFRS LO 416 Click to edit Master title style Key Points Differences •IFRS generally requires pre-harvest inventories of agricultural products (e.g., growing crops and farm animals) to be reported at fair value less cost of disposal GAAP generally requires these items to be recorded at cost 417 Click to edit Master title style Looking to the Future One convergence issue that will be difficult to resolve relates to the use of the LIFO cost flow assumption As indicated, IFRS specifically prohibits its use Conversely, the LIFO cost flow assumption is widely used in the United States because of its favorable tax advantages In addition, many argue that LIFO from a financial reporting point of view provides a better matching of current costs against revenue and, therefore, enables companies to compute a more realistic income 418 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 419 Homework P6.1, P6.5, P6.8, E6.8 420 ... building blocks of accounting: ethics, principles, and assumptions LO 10 The Building Blocks of Accounting Ethics in Financial Reporting LO 11 The Building Blocks of Accounting Accounting Standards... Standards Ensure high-quality financial reporting Primary accounting standard-setting bodies: International Accounting Standards Board (IASB) •Determines International Financial Reporting Standards... 130 countries Financial Accounting Standards Board (FASB) •Determines generally accepted accounting principles (GAAP) •Used by most companies in the U.S LO 12 The Building Blocks of Accounting Measurement