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Inventories

Inventories. Very Expensive Costs of holding: Interest, space, administrative Deterioration and obsolescence No return on the investment Non-value-added cost to customers Hiding errors

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Inventories

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  1. Inventories • Very Expensive • Costs of holding: Interest, space, administrative • Deterioration and obsolescence • No return on the investment • Non-value-added cost to customers • Hiding errors • In concept: Only need one of each to sell or show to a customer plus a way to purchase or make another one immediately.

  2. Basic Relationship • BI + Purchases = Available = CGS + EI • Beginning inventory = $80,000 • Purchases = $100,000 • Available = __________________ • Ending inventory = $40,000 • Cost of goods sold = __________________

  3. Methods • Physical flow--How are the specific products moved or sold? • Assumed flow for costing (cost flow) may be unrelated to physical flow. • Methods acceptable (USA:) • Specific identification • Weighted average • FIFO • LIFO

  4. Which method is most appropriate conceptually (physical=cost flow) for the following inventories? • Million tons of coal in one pile • Fresh food • A 10-million gallon tank of fuel oil • Expensive jewelry pieces

  5. Other Information • If LIFO used for tax, then by law must be used LIFO for the financial report. LIFO not allowed for IFRS. • Periodic inventory--take ending inventory to determine cost of goods sold. • Perpetual inventory--CGS recorded on each sale. • Physical inventory must be taken annually for tax purposes.

  6. Reporting • May use several methods for different inventories. • Disclose methods and proportions if material • Report inventories pledged or assigned.

  7. Lower of Cost or MKT • Inventories reported at LCM: • Cost by one of the acceptable methods Ceiling--Net realizable value=Price-Costs to sell   Market = Replacement cost Floor--Ceiling less normal profit

  8. PRODUCTION INVENTORY • Three types: Materials, Work in Process, Finished Goods • Cost of goods manufactured •    Materials •    Labor • Overhead • BWIP+Mat+Lab+OH-EWIP=Cost of goods manufactured (Purchases for a merchandiser)

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