Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc All Chapter Inventories and Cost of Sales Conceptual Chapter Objectives C1: Identify the items making up merchandise inventory C2: Identify the costs of merchandise inventory 5-3 Analytical Chapter Objectives A1: Analyze the effects of inventory methods for both financial and tax reporting A2: Analyze the effects of inventory errors on current and future financial statements A3: Assess inventory management using both inventory turnover and days’ sales in inventory 5-4 Procedural Chapter Objectives P1: Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average P2: Compute the lower of cost or market amount of inventory P3: Appendix 5A – Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average (see text for details) P4: Appendix 5B – Apply both the retail inventory and gross profit methods to estimate inventory (see text for details) 5-5 C1 Determining Inventory Items Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted Items requiring special attention include: Goods in Transit Goods on Consignment Goods Damaged or Obsolete 5-6 P1 Inventory Cost Flow Assumptions First-In, First-Out (FIFO) Assumes costs flow in the order incurred Last-In, First-Out (LIFO) Assumes costs flow in the reverse order incurred Weighted Average Assumes costs flow at an average of the costs available 5-7 A1 Financial Statement Effects of Costing Methods Because Because prices prices change, change, inventory inventory methods methods nearly nearly always always assign assign different different cost cost amounts amounts 5-8 A1 Financial Statement Effects of Costing Methods Advantages Advantages of of Methods Methods Weighted Average First-In, First-Out Last-In, First-Out Smoothes Smoothes out out price price changes changes Ending Ending inventory inventory approximates approximates current current replacement replacement cost cost Better Better matches matches current current costs costs in in cost cost of of goods goods sold sold with with revenues revenues 5-9 P2 Lower of Cost or Market Inventory Inventory must must be be reported reported at at market market value value when when market market is is lower lower than than cost cost Defined Defined as as current current replacement replacement cost cost (not (not sales sales price) price) Consistent Consistent with with the the conservatism conservatism principle principle Can Can be be applied applied three three ways: ways: (1) (1) (2) (2) (3) (3) separately separately to to each each individual individual item item to to major major categories categories of of assets assets to to the the whole whole inventory inventory 5-10 A2 Financial Statement Effects of Inventory Errors Income Statement Effects 5-11 A2 Financial Statement Effects of Inventory Errors Balance Sheet Effects 5-12 End of Chapter 5-13 .. .Chapter Inventories and Cost of Sales Conceptual Chapter Objectives C1: Identify the items making up merchandise inventory C2: Identify the costs of merchandise inventory 5- 3 Analytical Chapter. .. inventory 5- 10 A2 Financial Statement Effects of Inventory Errors Income Statement Effects 5- 11 A2 Financial Statement Effects of Inventory Errors Balance Sheet Effects 5- 12 End of Chapter 5- 13 ... retail inventory and gross profit methods to estimate inventory (see text for details) 5- 5 C1 Determining Inventory Items Merchandise inventory includes all goods that a company owns and holds for