Intermediate accounting IFRS 3rd ch08

Prepared by Coby Harmon University of California, Santa Barbara Westmont College 8-1 Valuation of Inventories: A CostBasis Approach CHAPTER LEARNING OBJECTIVES After studying this chapter, you should be able to: 8-2 Describe inventory classifications and different inventory systems Compare the cost flow assumptions used to account for inventories Identify the goods and costs included in inventory Determine the effects of inventory errors on the financial statements PREVIEW OF CHAPTER Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield 8-3 LEARNING OBJECTIVE Describe inventory classifications and different inventory systems Inventory Issues Classification Inventories are asset:  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 Classification ILLUSTRATION 8.1 8-5  One inventory account  Purchase merchandise in a form ready for sale LO Classification ILLUSTRATION 8.1 Three accounts 8-6  Raw Materials  Work in Process  Finished Goods LO ILLUSTRATION 8.2 Flow of Costs through Manufacturing and Merchandising Companies 8-7 LO Inventory Issues Inventory Cost Flow ILLUSTRATION 8.3 Two types of systems for maintaining inventory records — perpetual system or periodic system 8-8 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 8-9 LO Inventory Cost Flow Periodic System Purchases of merchandise are debited to Purchases Ending Inventory determined by physical count Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Purchases, net + 800,000 Goods available for sale900,000 Ending inventory - 125,000 Cost of goods sold $ 775,000 8-10 LO First-In, First-Out (FIFO) Perpetual Inventory System ILLUSTRATION 8.11 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 8-34 LO Inventory Valuation Methods—Summary Comparison assumes periodic inventory procedures and the following selected data 8-35 LO Inventory Valuation Methods—Summary ILLUSTRATION 8.12 Comparative Results of Average-Cost and FIFO Methods 8-36 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 8.13 Balances of Selected Items under Alternative Inventory Valuation Methods 8-37 LO Effect of Inventory Errors Ending Inventory Misstated LEARNING OBJECTIVE Determine the effects of inventory errors on the financial statements ILLUSTRATION 8.14 Financial Statement Effects of Misstated Ending Inventory The effect of an error on net income in one year will be counterbalanced in the next, however the income statement will be misstated for both years 8-38 LO Ending Inventory Misstated Illustration: Yei Chen Ltd understates its ending inventory by HK$10,000 in 2019; all other items are correctly stated ILLUSTRATION 8.15 Effect of Ending Inventory Error on Two Periods 8-39 LO Effect of Inventory Errors Purchases and Inventory Misstated ILLUSTRATION 8.16 Financial Statement Effects of Misstated Purchases and Inventory The understatement does not affect cost of goods sold and net income because the errors offset one another 8-40 LO APPENDIX 8A LIFO Cost Flow Assumption LEARNING OBJECTIVE Describe the LIFO cost flow assumption Under IFRS, LIFO is not permitted for financial reporting purposes Nonetheless, LIFO is permitted for financial reporting purposes in the United States, it is permitted for tax purposes in some countries, and its use can result in significant tax savings In this appendix, we provide an expanded discussion of LIFO inventory procedures 8-41 LO Last-In, First-Out (LIFO) Recall that Call-Mart Inc had the following transactions in its first month of operations 8-42 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 8-43 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 8-44 LO Inventory Valuation Methods—Summary Comparison assumes periodic inventory procedures and the following selected data 8-45 LO Inventory Valuation Methods—Summary ILLUSTRATION 8A.3 Comparative Results of Average-Cost and FIFO and LIFO Methods 8-46 Notice that gross profit and net income are lowest under LIFO, highest under FIFO, and somewhere in the middle under average-cost LO Inventory Valuation Methods—Summary ILLUSTRATION 8A.4 Balances of Selected Items under Alternative Inventory Valuation Methods 8-47 LIFO results in the highest cash balance at year-end (because taxes are lower) This example assumes that prices are rising The opposite result occurs if prices are declining LO COPYRIGHT Copyright © 2018 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 8-48 ... Determine the effects of inventory errors on the financial statements PREVIEW OF CHAPTER Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield 8-3 LEARNING OBJECTIVE Describe inventory...  near the end of their fiscal year,  to properly report inventory quantities in their annual accounting reports LO Inventory Issues Determining Cost of Goods Sold Companies must allocate the