1 / 13

Chapter 6,Part 2: Inventory

Capitalization of Inventor Primary accounts: Inventory and Cost of Goods Sold (COGS). Capitalize: add to an asset (inventory) account at the time of acquisition. What costs to capitalize? Cost to acquire, including transportation costs to facility (transportation-in or freight-in).

delu
Télécharger la présentation

Chapter 6,Part 2: Inventory

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Capitalization of Inventor Primary accounts: Inventory and Cost of Goods Sold (COGS). Capitalize: add to an asset (inventory) account at the time of acquisition. What costs to capitalize? Cost to acquire, including transportation costs to facility (transportation-in or freight-in). What items or units to include? General rule: (1) held for sale and (2) complete and unrestricted ownership. Chapter 6,Part 2: Inventory

  2. For Income Statement To calculate COGS: BI + Purchases (net) - EI = COGS To calculate Gross Profit (GP): Sales (net) - COGS = GP Formulas for COGS and Inventory Alternative: BI + P(net) = EI + COGS

  3. Given: BI + P (net) = EI + COGS How to assign costs of inflows [BI + P(net)] to EI and COGS? Methods: Specific identification:used internally by many companies now, because of unique ID tags. Average: used internally and externally by some manufacturing companies with large volume of identical inventories. FIFO- (first-in, first-out) for COGS andLISH (last-in, still here) for EI LIFO - (last-in, first-out) for COGS and FISH (first-in, still here) for EI FIFO and LIFO are the two primary techniques used for external financial reporting. Cost Flow Assumptions

  4. Given the following activity for January: Cost Total Units per Unit Cost Begin Inventory 20 $ 9.00 $180 Purchase 1/10 40 10.00 400 Purchase 1/22 30 11.00 330 Total available 90 units $910 Sales -55 units Ending inventory Class Problem - Cost Flows 35 units

  5. FIFO for COGS (top down) 55 units 20 @ $9 = $180 35 @ $10 = $350 Total = $530 LISH for EI (bottom up) 35 units 30 @ $11 = $330 5 @ $10 = $ 50 Total $380 FIFO(LISH)

  6. LIFO for COGS (bottom up) 55 units 30 @ $11 = $330 25 @ $10 = $250 Total = $580 FISH for EI (top down) 35 units 20 @ $ 9 = $180 15 @ $10 = $150 Total = $330 LIFO(FISH)

  7. First calculate average: Goods available cost = $910 Goods available units = 90 units Avg. = $10.11 per unit Now COGS: 55 units x $10.11 per unit = $ 556 Now EI: 35 units x $10.11 per unit = $354 Average

  8. In times of rising prices: highest COGS lowest COGS highest EI lowest EI highest Net Income lowest Net Income Comparison of FIFO, LIFO, and Average LIFO FIFO FIFO LIFO FIFO LIFO

  9. LIFO and taxes Why use LIFO for taxes? Why use LIFO for financial statements? LIFO and market valuation Should market value a company higher or lower if they use LIFO? LIFO liquidation What happens to net income with liquidation of an old LIFO layer? LIFO reserve what information is contained in this disclosure? Additional LIFO issues: Cash flow savings. Required, if used for tax purposes. Generally: higher Increases FIFO EI, LIFO EI and difference (reserve)

  10. For companies that use LIFO for tax and external financial reporting, a financial statement disclosure is required that indicates the calculated inventory(ies) at FIFO. The difference between the FIFO and LIFO inventories is called the LIFO Reserve. This number may be used to convert LIFO Inventory and COGS and Net Income to a FIFO basis, to allow for comparison to other companies. It also facilitates the calculation of the cash flow savings from reduced taxes. LIFO Reserve

  11. Calculations for ending inventory (EI): FIFO EI = LIFO EI + LIFO Reserve Calculation for COGS: FIFO COGS = LIFO COGS - Increase in LIFO Reserve ( or +Decrease in LIFO Reserve) Calculation for tax saving (assuming LIFO Reserve increased during the year): Tax Savings = Increase in LIFO Reserve x tax rate LIFO Reserve

  12. Based on conservatism, ending inventory is valued at cost or market value, whichever is lower. Problem: because it is an estimate, overestimation of the write-down can create hidden “reserves”. Recognizes value decreases immediately Lower EI, lower COGS means higher net income next period, when the inventory is sold. Ending Inventory:Applying the Lower-of-Cost-or-Market Rule

  13. Ratios Relating to Inventory Activity Inventory Turnover: COGS Average Inventory Indicates how often we “turn over” or sell our inventory. High factor is a positive indicator. Average Days Outstanding: Inventory COGS/365 Indicates how many days Inventory is outstanding. Shorter periods are desirable. Gross profit percentage = GP/Sales Changes in GP% indicate changes in profit from product sales. 13

More Related