Chapter 8 - Valuation of inventories: A cost-basis approach. After studying this chapter, you should be able to: Identify major classifications of inventory, distinguish between perpetual and periodic inventory systems, identify the effects of inventory errors on the financial statements, understand the items to include as inventory cost, describe and compare the cost flow assumptions used to account for inventories.
8-1 PREVIEW OF CHAPTER Intermediate Accounting IFRS 2nd Edition Kieso, Weygandt, and Warfield 8-2 Valuation of Inventories: A CostBasis 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: uitems held for sale in the ordinary course of business, or ugoods to be used in the production of goods to be sold Businesses with Inventory Merchandising Company 8-4 or Manufacturing Company LO 1 INVENTORY ISSUES Classification ILLUSTRATION 81 uOne inventory account uPurchase merchandise in a form ready for sale 8-5 LO 1 INVENTORY ISSUES Classification ILLUSTRATION 81 Three accounts 8-6 u Raw Materials u Work in Process u Finished Goods LO 1 INVENTORY ISSUES Classification 8-7 ILLUSTRATION 82 Flow of Costs through Manufacturing and Merchandising Companies LO 1 Valuation of Inventories: A CostBasis 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 8-8 INVENTORY ISSUES Inventory Cost Flow ILLUSTRATION 83 Two types of systems for maintaining inventory records — perpetual system or periodic system 8-9 LO 2 Inventory Cost Flow Perpetual System Purchases of merchandise are debited to Inventory Freightin 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 2 AverageCost MovingAverage Method ILLUSTRATION 814 MovingAverage Method— Perpetual Inventory In this method, CallMart computes a new average unit cost each time it makes a purchase 8-40 LO 5 Cost Flow Assumptions FirstIn, FirstOut (FIFO) uAssumes goods are used in the order in which they are purchased uApproximates the physical flow of goods uEnding inventory is close to current cost uFails to match current costs against current revenues on the income statement 8-41 LO 5 FirstIn, FirstOut (FIFO) Periodic Inventory System ILLUSTRATION 815 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 5 FirstIn, FirstOut (FIFO) Perpetual Inventory System ILLUSTRATION 816 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 5 Inventory Valuation Methods—Summary Comparison assumes periodic inventory procedures and the following selected data 8-44 LO 5 Inventory Valuation Methods—Summary ILLUSTRATION 817 Comparative Results of AverageCost and FIFO Methods 8-45 LO 5 Inventory Valuation Methods—Summary When prices are rising, averagecost results in the higher cash balance at yearend (because taxes are lower) ILLUSTRATION 818 Balances of Selected Items under Alternative Inventory Valuation Methods 8-46 LO 5 Valuation of Inventories: A CostBasis Approach LEARNING OBJECTIVES After studying this chapter, you should be able to: 8-47 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 APPENDIX 8A Describe the LIFO cost flow assumption LASTIN, FIRSTOUT (LIFO) Recall that CallMart Inc. had the following transactions in its first month of operations 8-48 LO 6 LASTIN, FIRSTOUT (LIFO) Periodic Inventory System ILLUSTRATION 8A1 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 6 LASTIN, FIRSTOUT (LIFO) Perpetual Inventory System ILLUSTRATION 8A2 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 6 Inventory Valuation Methods—Summary Comparison assumes periodic inventory procedures and the following selected data 8-51 LO 6 Inventory Valuation Methods—Summary ILLUSTRATION 8A3 Comparative Results of AverageCost and FIFO and LIFO Methods 8-52 Notice that gross profit and net income are lowest under LIFO, highest under FIFO, and somewhere in the middle under averagecost LO 6 Inventory Valuation Methods—Summary ILLUSTRATION 8A4 Balances of Selected Items under Alternative Inventory Valuation Methods 8-53 LIFO results in the highest cash balance at yearend (because taxes are lower). This example assumes that prices are rising. The opposite result occurs if prices are declining LO 6 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 backup 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 Valuation of Inventories: A CostBasis Approach LEARNING OBJECTIVES After studying this? ?chapter, you should be able to:... from the cost of inventories 8- 31 LO 4 Treatment of Purchase Discounts ** * ILLUSTRATION? ?8? ?11 Entries under Gross and Net Methods 8- 32 * $4,000 x 2% = $80 ** $10,000 x 98% = $9 ,80 0 LO 4 Valuation of Inventories: ... uMeasuring a specific physical flow of inventory is often impossible 8- 38 LO 5 AverageCost WeightedAverage Method 8- 39 ILLUSTRATION? ?8? ?13 WeightedAverage Method—Periodic Inventory LO 5 AverageCost MovingAverage Method ILLUSTRATION? ?8? ?14 MovingAverage Method—