8-1 PREVIEW OF CHAPTER Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 8-2 8 Valuation of Inventories: A Cost-Basis Approach LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify major classifications of inventory Understand the items to include as inventory cost Distinguish between perpetual and periodic inventory systems Describe and compare the methods used to price inventories Determine the goods included in inventory and the effects of inventory errors on the financial statements 8-3 INVENTORY ISSUES Classification Inventories are assets: items held for sale in the ordinary course of business, or goods to be used in the production of goods to be sold Businesses with Inventory Merchandising Company 8-4 or Manufacturing Company LO INVENTORY ISSUES ILLUSTRATION 8-1 Classification One inventory account Purchase merchandise in a form ready for sale 8-5 LO INVENTORY ISSUES ILLUSTRATION 8-1 Classification Three accounts 8-6 Raw Materials Work in Process Finished Goods LO INVENTORY ISSUES ILLUSTRATION 8-2 Flow of Costs through Manufacturing and Merchandising Companies Classification 8-7 LO Valuation of Inventories: A Cost-Basis Approach LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify major classifications of inventory Understand the items to include as inventory cost Distinguish between perpetual and periodic inventory Describe and compare the methods used to price inventories systems Determine the goods included in inventory and the effects of inventory errors on the financial statements 8-8 INVENTORY ISSUES Inventory Cost Flow ILLUSTRATION 8-3 Two types of systems for maintaining inventory records — perpetual system or periodic system 8-9 LO Inventory Cost Flow Perpetual System Purchases of merchandise are debited to Inventory Freight-in is debited to Inventory Purchase returns and allowances and purchase discounts are credited to Inventory Cost of goods sold is debited and Inventory is credited for each sale Subsidiary records show quantity and cost of each type of inventory on hand The perpetual inventory system provides a continuous record of the balance in both the Inventory and Cost of Goods Sold accounts 8-10 LO Average-Cost ILLUSTRATION 8-14 Moving-Average Method Moving-Average Method—Perpetual Inventory In this method, Call-Mart computes a new average unit cost each time it makes a purchase 8-40 LO Cost Flow Assumptions First-In, First-Out (FIFO) 8-41 Assumes goods are used in the order in which they are purchased Approximates the physical flow of goods Ending inventory is close to current cost Fails to match current costs against current revenues on the income statement LO First-In, First-Out (FIFO) Periodic Inventory System ILLUSTRATION 8-15 FIFO Method—Periodic Inventory Determine cost of ending inventory by taking the cost of the most recent purchase and working back until it accounts for all units in the inventory 8-42 LO First-In, First-Out (FIFO) Perpetual Inventory System ILLUSTRATION 8-16 FIFO Method— Perpetual Inventory In all cases where FIFO is used, the inventory and cost of goods sold would be the same at the end of the month whether a perpetual or periodic system is used 8-43 LO Inventory Valuation Methods—Summary Comparison assumes periodic inventory procedures and the following selected data 8-44 LO Inventory Valuation Methods—Summary ILLUSTRATION 8-17 Comparative Results of Average-Cost and FIFO Methods 8-45 LO Inventory Valuation Methods—Summary When prices are rising, average-cost results in the higher cash balance at year-end (because taxes are lower) ILLUSTRATION 8-18 Balances of Selected Items under Alternative Inventory Valuation Methods 8-46 LO Valuation of Inventories: A Cost-Basis Approach LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify major classifications of inventory Understand the items to include as inventory cost Distinguish between perpetual and periodic inventory systems Describe and compare the methods used to price inventories Determine the goods included in inventory and the effects of APPENDIX 8A inventory errors on the financial statements 8-47 Describe the LIFO cost flow assumption LAST-IN, FIRST-OUT (LIFO) Recall that Call-Mart Inc had the following transactions in its first month of operations 8-48 LO LAST-IN, FIRST-OUT (LIFO) Periodic Inventory System ILLUSTRATION 8A-1 LIFO Method—Periodic Inventory The cost of the total quantity sold or issued during the month comes from the most recent purchases 8-49 LO LAST-IN, FIRST-OUT (LIFO) Perpetual Inventory System ILLUSTRATION 8A-2 LIFO Method—Perpetual Inventory LIFO results in different ending inventory and cost of goods sold amounts than the amounts calculated under the periodic method 8-50 LO Inventory Valuation Methods—Summary Comparison assumes periodic inventory procedures and the following selected data 8-51 LO Inventory Valuation Methods—Summary ILLUSTRATION 8A-3 Comparative Results of Notice that gross profit and net income are lowest under LIFO, highest under FIFO, and Average-Cost and FIFO and LIFO Methods somewhere in the middle under average-cost 8-52 LO Inventory Valuation Methods—Summary ILLUSTRATION 8A-4 Balances of Selected Items under LIFO results in the highest cash balance at year-end (because taxes are lower) This example Alternative Inventory Valuation Methods assumes that prices are rising The opposite result occurs if prices are declining 8-53 LO COPYRIGHT Copyright © 2014 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright 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 8-54 ...PREVIEW OF CHAPTER Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 8-2 8 Valuation of Inventories: A Cost-Basis Approach LEARNING OBJECTIVES After studying this chapter, ... 8-7 LO Valuation of Inventories: A Cost-Basis Approach LEARNING OBJECTIVES After studying this chapter, you should be able to: Identify major classifications of inventory Understand the items... near the end of their fiscal year, to properly report inventory quantities in their annual accounting reports LO INVENTORY ISSUES Basic Issues in Inventory Valuation Companies must allocate