Kế toán, kiểm toán - Chapter 6: Reporting and analyzing inventory

CHAPTER 6:REPORTING AND ANALYZING INVENTORYLO 1: Describe the steps in determining inventory quantities.LO 2: Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system.LO 3: Explain the effects on the financial statements of choosing each of the inventory cost formulas.LO 4: Identify the effects of inventory errors on the financial statements.LO 5: Demonstrate the presentation and analysis of inventory.LO 6: Apply the FIFO and average cost formulas under a periodic inventory system (Appendix 6A).LEARNING OBJECTIVESWhether companies use a periodic or perpetual system, physical inventory must still be counted at the end of the period:To check the accuracy of the perpetual inventory recordsTo determine the amount of inventory lost to shrinkage or theftDetermining Inventory QuantitiesNeed to consider ownership of goods when taking inventoryGoods in transit at the end of the period make the determination of ownership more complicated:Determine who has legal title to goods in transitInclude in inventory if company has legal titleDetermining OwnershipApply freight/shipping concepts from Chapter 5:FOB shipping point versus FOB destinationOwnership of consigned goods remains with the owner (the consignor), not the holder of the goods (the consignee)Goods taken home “on approval” by a customer are still owned by the companyDetermining Ownership (continued)To ensure inventory is properly counted, companies must have a good system of internal control:Internal control systems include control activities; an example of which is review and reconciliationCounting inventory is a good example of a control activityAllows reconciliation to information in company’s inventory systemTaking InventoryOnce inventory quantities are counted, must apply unit costs to determine total cost of inventoryUnits of the same inventory can be purchased at different pricesWhich costs should be used?Inventory Cost FormulasTracks physical flow of goodsUsed in perpetual system onlyCan only be used whereActual costs of each item can be determinedGoods are easily distinguishable (not easily interchangeable)Or for goods produced and segregated for specific projectsSpecific IdentificationWhat are some examples of companies and their products that might use the specific identification formula?Discussion QuestionCost formulas assume a flow of costs that may not be the same as the actual flow of goodsFIFO (First-in, first-out)Cost of first item purchased is cost of first item soldAverage CostCost is determined using a moving (weighted) average of the cost of the items purchasedCost FormulasMerchandise inventory is recorded at most recent (current) cost in the current assets section of statement of financial positionCost of goods sold is recorded as an expense at oldest inventory cost on income statementEnding inventory and cost of goods sold under FIFO are the same for periodic and perpetual inventory systemsFirst-in, First-out (FIFO)Perpetual Inventory Schedule - FIFOUsed when physical flow of inventory cannot specifically be measuredUnder a perpetual inventory system, a new weighted (called moving) average is calculated after each purchaseUsed to record cost of goods sold and ending inventoryAverage CostPerpetual Inventory Schedule – Average CostWhy is the average cost formula called a “moving” average cost formula in a perpetual inventory system?Discussion QuestionChoose a formula that bestRepresents as closely as possible physical flow of goods, Reports ending inventory at recent cost, andUse the same formula for inventories of similar nature and usageChoice of Inventory Cost FormulaSummary of Advantages of Cost FormulasSummary of Financial Statement Effects Errors can occur in accounting for inventoryQuantity or costs assigned to inventory are incorrectErrors made when recording goods in transit at the end of accounting period Errors affect bothStatement of financial position – through merchandise inventoryIncome statement – through cost of goods soldInventory ErrorsEffect of Inventory Errors on Income StatementEffect of Inventory Errors on Statement of Financial PositionAn error in ending inventory of the current period will have a reverse effect on net income in the next accounting periodAn error in ending inventory affects retained earnings of the same periodBut not the next period, as the error reversesSummary of Effect of ErrorsWhen the net realizable (fair) value is less than cost, the value is written downThe lower of cost and net realizable value (LCNRV) ruleNet realizable value is selling price less any costs to make goods ready for saleValuing Inventory at the Lower of Cost and Net Realizable ValueApply rule to individual inventory itemsReduce inventory by crediting it for the amount of write-down, debit is to cost of goods soldReverse write-down if value subsequently recoversWhen conditions that caused the write-down have changedLCNRV Rule - ApplicationUnder what circumstances can a write-down in inventory to net realizable value be reversed?Discussion QuestionIn the statement of financial position:At the lower of cost and NRVIn the notes to the statementsTotal amount of inventoryCost of goods soldCost formula(s)Amount of write-downs or reversalsNo significant differences between IFRS and ASPEReporting InventoryHow much inventory should a company have?Two ratios to help manage:Inventory turnover ratio – measures the number of times, on average, inventory is sold in a periodDays in inventory ratio – converts inventory turnover ratio into number of days inventory is heldInventory TurnoverIn general, the higher the inventory turnover and the lower the days in inventory ratios, the betterInventory RatiosInventory Turnover=Cost of goods soldAverage inventoryDays in Inventory= 365 days Inventory turnoverBoth inventory cost formulas (FIFO and average) can also be used in periodic systemsAllocation is made at the end of the periodAppendix 6A – Periodic Inventory SystemsAppendix 6A – Periodic System Under FIFOAppendix 6A – Periodic System Under Average CostCOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. 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