Kế toán, kiểm toán - Chapter 8: Inventories: measurement

INVENTORIES: MEASUREMENTChapter 8Recording and Measuring InventoryMerchandise InventoryGoods acquired for resaleManufacturing InventoryRaw Materialswork-in-progress Finished GoodsTypes of InventoryManufacturing InventoriesRawMaterialsWork inProgressFinishedGoodsCost of Goods SoldDirectLaborManufacturingOverhead$XX$XX$XX Raw materials purchased Direct labor incurred Manufacturing overhead incurred Raw materials used Direct labor applied Manufacturing overhead applied Work in progress transferred to finished goods Finished goods soldInventory SystemsPerpetual Inventory SystemThe inventory account is continuously updated as purchases and sales are made.Periodic Inventory SystemThe inventory account is adjusted at the end of a reporting cycle.Two accounting systems are used to record transactions involving inventory:Perpetual Inventory SystemLothridge Wholesale Beverage Company (LWBC) begins2013 with $120,000 in inventory. During the period itpurchases on account $600,000 of merchandise for resaleto customers.Returns of inventory are credited to the inventory account.Discounts on inventory purchases can be recorded using the gross or net method.2013Inventory 600,000 Accounts payable 600,000Purchase of merchandise inventory on accountPerpetual Inventory SystemDuring 2013, LWBC sold, on account, inventory with a retailprice of $820,000 and a cost basis of $540,000, to customers.2013Inventory 600,000 Accounts payable 600,000Purchase of merchandise inventory on account.2013Accounts receivable 820,000 Sales revenue 820,000Record sales on account.Cost of goods sold 540,000 Inventory 540,000Record cost of goods sold.Periodic Inventory SystemThe periodic inventory system is not designed to track either the quantity or cost of merchandise inventory. Cost of goods sold is calculated, using the schedule below, after the physical inventory count at the end of the period.Periodic Inventory SystemLothridge Wholesale Beverage Company (LWBC) begins2013 with $120,000 in inventory. During the period itpurchases on account $600,000 of merchandise for resaleto customers.2013Purchases 600,000 Accounts payable 600,000Purchase of merchandise inventory on accountPeriodic Inventory SystemNo entry is made to record Cost of Goods Sold. A physical countof Ending Inventory shows a balance of $180,000. Let’scalculate Cost of Goods Sold at the end of 2013.During 2013, LWBC sold, on account, inventory with a retailprice of $820,000 to customers, and a cost basis of $540,000.2013Accounts receivable 820,000 Sales revenue 820,000Record sales on account.Periodic Inventory SystemWe need the following adjusting entry to record cost of good sold.December 31, 2013Cost of goods sold 540,000Inventory (ending) 180,000 Inventory (beginning) 120,000 Purchases 600,000To adjust inventory, close purchases, and record cost of goods sold.Comparison of Inventory SystemsWhat is Included in Inventory?General RuleAll goods owned by the company on the inventory date, regardless of their location.Goods in TransitGoods on ConsignmentDepends on FOB shipping terms.Expenditures Included in InventoryInvoice PriceFreight-in on Purchases+Purchase Returns and AllowancesPurchase DiscountsPurchase ReturnsNovember 8, 2013Accounts payable 2,000 Accounts payable 2,000 Purchase returns and allowances 2,000 Inventory 2,000On November 8, 2013, LWBC returns merchandise that had a cost to LWBC of $2,000, and a cost basis to the seller of 1,600.Periodic Inventory MethodPerpetual Inventory MethodReturns of inventory are credited to the Purchase Returns and Allowances account when using the periodic inventory method.The returns are credited to Inventory using the perpetual inventory method.Purchase DiscountsOctober 5, 2013Purchases 20,000 Purchases 19,600 Accounts payable 20,000 Accounts payable 19,600October 14, 2013Accounts payable 14,000 Accounts payable 13,720 Purchase discounts 280 Cash 13,720 Cash 13,720November 4, 2013Accounts payable 6,000 Accounts payable 5,880 Cash 6,000 Interest expense 120 Cash 6,000Discount terms are 2/10, n/30.$14,000x 0.02$ 280Partial payment not made within the discount periodGross MethodNet Method$20,000x 0.02$ 400 -120$ 280Inventory Cost Flow AssumptionsSpecific identificationAverage costFirst-in, first-out (FIFO)Last-in, first-out (LIFO)Perpetual Average CostPicture This, LLC, uses a standard frame size for all pictures to hold down product costs. The following schedule shows the frame inventory for Picture This, LLC, for September.The physical inventory count at September 30 shows 1,400 frames in ending inventory. Use the perpetual average cost method to determine: (1) Ending inventory cost (2) Cost of goods soldPerpetual Average CostPerpetual Average Cost$61,750 ÷ (1,200 + 900 + 550) = $23.30 roundedPerpetual Average Cost[(1,650 × $23.30) + (600 × $27)] ÷ 2,250 = $24.29 roundedPerpetual Average CostEnding inventory = 1,400 units × $25.55 = $35,770Rounding errorPerpetual Average CostWeighted-Average Periodic SystemLet’s use the same information to assign costs to ending inventory and cost of goods sold using the periodic system.Beginning Inventory (1,200 units)Purchases (2,850 units)Available for Sale(4,050 units)Ending Inventory(1,400 units)Goods Sold(2,650)$100,350 ÷ 4,050 = $24.7778 weighted-average per unit costWeighted-Average Periodic SystemFirst-In, First-Out (FIFO)The cost of the oldest inventory items are charged to COGS when goods are sold. The cost of the newest inventory items remain in ending inventory.The FIFO method assumes that items are sold in the chronological order of their acquisition.First-In, First-Out (FIFO)Even though the periodic and the perpetual approaches differ in the timing of adjustments to inventory . . .. . . COGS and Ending Inventory Cost are the same under both approaches.First-In, First-Out (FIFO)Periodic Inventory SystemThese are the 1,400 most recently acquired units.First-In, First-Out (FIFO)Periodic Inventory SystemFirst-In, First-Out (FIFO)Perpetual Inventory SystemThese are the first 2,650 units acquired.First-In, First-Out (FIFO)Perpetual Inventory SystemLast-In, First-Out (LIFO)The cost of the newest inventory items are charged to COGS when goods are sold. The cost of the oldest inventory items remain in inventory.The LIFO method assumes that the newest items are sold first, leaving the older units in inventory.Last-In, First-Out (LIFO)Unlike FIFO, using the LIFO method may result in COGS and Ending Inventory Cost that differ under the periodic and perpetual approaches. Last-In, First-OutPerpetual Inventory System These are the oldest units in inventory and are most likely to remain in inventory when using LIFO.Last-In, First-OutPerpetual Inventory System The Cost of Goods Sold for the September 15 sale is $24,550. After this sale, there are 1,650 units in inventory at various costs per unit.Last-In, First-OutPerpetual Inventory System The Cost of Goods Sold for the September 22 sale is $18,600. After this sale, there are 1,550 units in inventory at various per unit cost. Last-In, First-OutPerpetual Inventory System The Cost of Goods Sold for the September 30 sale is $26,000. After this sale, there are 1,400 units in inventory (1,200 × $22.00) per unitand (200 × $24.00) for a total cost of ending inventory of $31,200. Last-In, First-OutPeriodic Inventory System Last-In, First-OutPeriodic Inventory System Last-In, First-OutPerpetual Inventory System When Prices Are Rising . . . LIFOMatches high (newer) costs with current (higher) sales.Inventory is valued based on low (older) cost basis.Results in lower taxable income.FIFOMatches low (older) costs with current (higher) sales.Inventory is valued at approximate replacement cost.Results in higher taxable income.U. S. GAAP vs. IFRSLIFO is permitted and used by U.S. Companies.If used for income tax reporting, the company must use LIFO for financial reporting.Conformity with IAS No. 2 would cause many U.S. companies to lose a valuable tax shelter.LIFO is an important issue for U.S. multinational companies. Unless the U.S. Congress repeals the LIFO conformity rule, in inability to use LIFO under IFRS will impose a serious impediment to convergence.IAS No. 2, Inventories, does not permit the use of LIFO.Because of this restriction, many U.S. companies use LIFO only for domestic inventories.Decision Makers’ PerspectiveFactors Influencing Method ChoiceHow are income taxes affected by inventory method choice?How closely do reportedcosts reflect actualflow of inventory?How well are costs matched againstrelated revenues?Inventory Management Gross profit ratio =Gross profitNet salesInventory turnover ratio =Cost of goods soldAverage inventoryThe higher the ratio, the higher is the markup a company is able to achieve on its products. (Beginning inventory + Ending inventory2Designed to evaluate a company’seffectiveness in managing itsinvestment in inventoryQuality of EarningsChanges in the ratios we discussed above often provide information about the quality of a company’s current period earnings. For example, a slowing turnover ratio combined with higher than normal inventory levels may indicate the potential for decreased production, obsolete inventory, or a need to decrease prices to sell inventory (which will then decrease gross profit ratios and net income).Many believe that manipulating income reduces earnings quality because it can mask permanent earnings. Inventory write-downs and changes in inventory method are two additional inventory-related techniques a company could use to manipulate earnings.LIFO ReservesCause: Different inventory cost flow assumptions between internal records (non-LIFO) and external reporting (LIFO)(Optional) adjustment at end of accounting period to internal records gives rise to LIFO reservesAdjustment: Difference between inventory value under the non-LIFO and LIFO assumption brought to LIFO reserves, a contra-inventory account. Corresponding account is the cost of goods sold.Supplemental LIFO DisclosuresMany companies use LIFO for external reporting and income tax purposes but maintain internal records using FIFO or average cost.The conversion from FIFO or average cost to LIFO takes place at the end of the period. The conversion may look like this:LIFO LiquidationLIFO inventory costs in the balance sheet are “out of date” because they reflect old purchase transactions.When prices rise . . .If inventory declines, these “out of date” costs may be charged to current earnings.This LIFOliquidation results in “paper profits.”Methods of Simplifying LIFOThe objectives of using LIFO inventory pools are to simplify recordkeeping by grouping inventory units into pools based on physical similarities of the individual units and to reduce the risk of LIFO layer liquidation. For example, a glass company might group its various grades of window glass into a single window pool. Other pools might be auto glass and sliding door glass. A lumber company might pool its inventory into hardwood, framing lumber, paneling, and so on. LIFO pools allow companies to account for a few inventory pools rather than every specific type of inventory separately.LIFO Inventory PoolsExampleThe replacement inventory differs from the old inventory on hand. We just create a new layer.Methods of Simplifying LIFODollar-Value LIFO (DVL)DVL inventory pools are viewed as layers of value, rather than layers of similar units.DVL simplifies LIFO record-keeping.DVL minimizes the probability of layer liquidation.At the end of the period, we determine if a new inventory layer was added by comparing ending inventory to beginning inventory.Methods of Simplifying LIFODollar-Value LIFO (DVL)We need to determine if the increase in ending inventory over beginning inventory was due to a price increase or an increase in inventory.1a. Compute a Cost Index for the year.Methods of Simplifying LIFODollar-Value LIFO (DVL)1b. Deflate the ending inventory value using the cost index.1c. Compare ending inventory (at base year cost) to beginning inventory.Methods of Simplifying LIFODollar-Value LIFO (DVL)Next, identify the layers in ending inventory and the years they were created.Sum all the layers to arrive at Ending Inventory at DVL cost.Convert each layer’s base year cost to layer year cost by multiplying to the cost index.Methods of Simplifying LIFODollar-Value LIFO (DVL)Masterwear reports the following inventoryand general price information. Let’s look at the solution to this example.Methods of Simplifying LIFODollar-Value LIFO (DVL)Masterwear reports the following inventoryand general price information. Methods of Simplifying LIFODollar-Value LIFO (DVL)First, determine the LIFO layer forthe current year . . .Methods of Simplifying LIFODollar-Value LIFO (DVL)At the LIFO layer at end of period prices to theending LIFO inventory from last period. End of Chapter 8