Kế toán tài chính 2 - Chapter 10: Inventories

InventoriesMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 10Learning ObjectivesIdentify and explain the management issues associated with accounting for inventories.Define inventory cost and relate it to goods flow and cost flow.Calculate the pricing of inventory, using the cost basis under the periodic inventory system.2Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Apply the perpetual inventory system to the pricing of inventories at cost.State the effects of inventory methods and misstatements of inventory on income determination, income taxes, and cash flows.Apply the lower-of-cost-or-market (LCM) rule to inventory valuation.3Copyright © Houghton Mifflin Company. All rights reserved.Supplemental ObjectiveEstimate the cost of ending inventory using the retail method and gross profit method.4Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Associated with Accounting for InventoriesObjective 1Identify and explain the management issues associated with accounting for inventories5Copyright © Houghton Mifflin Company. All rights reserved.Inventory is considered a current asset because it will normally be sold within a year’s time or within a company’s operating cycleMerchandising entitiesMerchandise inventory consists of all goods owned and held for sale in the regular course of businessManufacturing entities Maintain other types of inventoriesRaw MaterialsWork in ProcessFinished Goods6Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Associated with Accounting for InventoriesApplying the matching rule to inventoriesAssessing the impact of inventory decisionsEvaluating the level of inventory7Copyright © Houghton Mifflin Company. All rights reserved.Applying the Matching Rule to InventoriesA major objective of accounting for inventories is the proper determination of income (not to determine the most realistic inventory value)This is achieved through the process of matching appropriate costs against revenues8Copyright © Houghton Mifflin Company. All rights reserved.Recall that cost of goods sold is dependent upon the cost assigned to ending inventory, or goods not soldThe higher the cost of ending inventoryThe lower the cost of goods soldAnd, the lower the cost of goods sold, the higher the gross marginGross margin has a direct effect on the amount of net income so the higher the amount of gross margin, the higher the amount of net income reported on the income statementEffect of Inventory Accounting on Income9Copyright © Houghton Mifflin Company. All rights reserved.The reverse is also trueThe lower the cost of ending inventoryThe higher the cost of goods soldAnd the higher the cost of goods sold, the lower the gross marginGross margin has a direct effect on the amount of net income so the lower the amount of gross margin, the lower the amount of net income reported on the income statementEffect of Inventory Accounting on Income10Copyright © Houghton Mifflin Company. All rights reserved.Management Choices in Accounting for Inventories11Copyright © Houghton Mifflin Company. All rights reserved.Assessing the Impact of Inventory DecisionsDecisions regarding inventory usually result in different amounts of reported income, which affectExternal evaluation by investors and creditorsInternal evaluation, e.g. executive compensationIncome taxesManagement must balanceThe goal of proper income determinationThe goal of minimizing income taxesThe effects on the company’s cash flows12Copyright © Houghton Mifflin Company. All rights reserved.Evaluating the Level of InventoryManagement issues involving the level of inventoryBalancing the handling and storage costs of maintaining inventory with the demands of customersCosts of high inventory levels can be substantialCosts of low inventory levels include disgruntled customers and lost sales13Copyright © Houghton Mifflin Company. All rights reserved.Evaluating the Level of Inventory (cont’d)Measures used in evaluating the level of inventory includeInventory turnoverAverage days’ inventory on hand14Copyright © Houghton Mifflin Company. All rights reserved.Inventory Turnover indicates the number of times a company’s average inventory is sold during an accounting period15Copyright © Houghton Mifflin Company. All rights reserved.Inventory Turnover IllustratedJ.C. Penney’s cost of goods sold was $22,573 million at the end of 2002, and its merchandise inventory was $4,945 million at the end of 2002 and $4,930 at the end of 2001This means that J.C. Penney sold its average inventory 4.6 times during the year 200216Copyright © Houghton Mifflin Company. All rights reserved.Inventory Turnover for Selected Industries17Copyright © Houghton Mifflin Company. All rights reserved.Average Days’ Inventory on Hand indicates the average number of days required to sell the inventory on hand18Copyright © Houghton Mifflin Company. All rights reserved.J.C. Penney’s inventory turnover for 2002 was 4.6 timesThis means that it took an average of 79.3 days for J.C. Penney to sell its inventory on hand during the year 2002Average Days’ Inventory on Hand Illustrated19Copyright © Houghton Mifflin Company. All rights reserved.Average Days’ Inventory on Hand for Selected Industries20Copyright © Houghton Mifflin Company. All rights reserved.Managing Inventory LevelsTo reduce inventory levels, many companies use, in conjunction with each other Supply-chain managementManaging inventory and purchasing through business-to-business transactions over the InternetJust-in-time operating environmentWorking closely with suppliers to coordinate and schedule inventory shipments so they arrive just as they are needed21Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat are some of the costs associated with carrying inventory?Insurance, property tax, and storage costs. There is also the possibility of additional spoilage and employee theft.22Copyright © Houghton Mifflin Company. All rights reserved.Inventory Cost and Goods FlowObjective 2Define inventory cost and relate it to goods flow and cost flow23Copyright © Houghton Mifflin Company. All rights reserved.The Primary Basis of Accounting for Inventories is cost,which has been defined generally as the price paid or consideration given to acquire an assetAccording to the AICPA24Copyright © Houghton Mifflin Company. All rights reserved.Inventory CostIncludes the following costsInvoice price less purchases discountsFreight in, including insurance in transitApplicable taxes and tariffsCosts of ordering, receiving, and storingIn principle, should be included in inventory costIn practice, are usually considered expenses of the periodAre too difficult to allocate to specific inventory items25Copyright © Houghton Mifflin Company. All rights reserved.Merchandise in TransitThe status of merchandise in transit must be examined to determine if it should be included in the inventory countMerchandise inventory includes all merchandise owned by the companyIncludesOutgoing goods shipped FOB destinationIncoming goods shipped FOB shipping point26Copyright © Houghton Mifflin Company. All rights reserved.Merchandise in Transit27Copyright © Houghton Mifflin Company. All rights reserved.Merchandise on HandNot Included in InventoryMerchandise sold but not yet shippedGoods held on consignmentTitle stays with the consignor until consignee sells the goodsMust not be included in the physical inventory of the consignee28Copyright © Houghton Mifflin Company. All rights reserved.Goods Flow Versus Cost FlowIt is necessary to make assumptions about the order in which items have been soldWhen identical items are bought and sold, it is often impossible to identify which have been sold and which remain in inventoryAssumption is about cost flows rather than goods flow29Copyright © Houghton Mifflin Company. All rights reserved.Goods Flow Versus Cost FlowGoods flowRefers to the actual physical movement of goods in the operations of a companyCost flowRefers to the association of costs with their assumed flow in the operations of a companySeveral choices of assumed cost flow are available under generally accepted accounting principles30Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy can cost flow differ from goods flow?Because cost flow can be based on assumptions about goods flow31Copyright © Houghton Mifflin Company. All rights reserved.Methods of Pricing Inventory at Cost Under the Periodic SystemObjective 3Calculate the pricing of inventory, using the cost basis under the periodic inventory system32Copyright © Houghton Mifflin Company. All rights reserved.Methods of Pricing Inventory at Cost Under the Periodic SystemThe value of ending inventory is the result of two measurementsQuantityDetermined by taking a physical countPriceBased on the assumed cost flow of the goods as they are bought and sold33Copyright © Houghton Mifflin Company. All rights reserved.Methods of Pricing Inventory at CostAccountants use one of four generally accepted methods to price inventorySpecific identification methodAverage-cost methodFirst-in, first-out (FIFO) methodLast-in, first-out (LIFO) methodThe choice of method depends on theNature of the businessFinancial effects of the methodCost of implementing the method34Copyright © Houghton Mifflin Company. All rights reserved.Illustrative Data for the Four Periodic Inventory Methods35Copyright © Houghton Mifflin Company. All rights reserved.Specific Identification Method identifies the cost of each item in ending inventory as coming from a specific purchaseMay be used for high-priced articlesDisadvantagesDifficulty and impracticality of keeping track of the purchase and sale of individual itemsWhen items are identical but purchased at different costs, deciding which items were sold becomes arbitraryCompany can raise or lower income by choosing the lower- or higher-cost items36Copyright © Houghton Mifflin Company. All rights reserved.Assume that the June 30 inventory consisted of 50 units from the June 1 inventory100 units from the June 13 purchaseand 70 units from the June 25 purchaseSpecific Identification Method Illustrated37Copyright © Houghton Mifflin Company. All rights reserved.The cost assigned to the inventory would be Notice that the company can raise or lower income by choosing lower- or higher-cost itemsSpecific Identification Method (cont’d)38Copyright © Houghton Mifflin Company. All rights reserved.Average-Cost Method computes the average cost of all goods available for sale during the period in order to determine the value of ending inventoryTends to level out the effects of cost increases and decreasesIs criticized by some who believe that recent costs are more relevant for income measurement and decision making39Copyright © Houghton Mifflin Company. All rights reserved.Average-Cost Method Illustrated 40Copyright © Houghton Mifflin Company. All rights reserved.First-In, First-Out (FIFO) Method is based on the assumption that the costs of the first items acquired should be assigned to the first items soldThe cost of ending inventory reflects the cost of merchandise from the most recent purchasesThe costs assigned to cost of goods sold are from the earliest purchases41Copyright © Houghton Mifflin Company. All rights reserved.FIFO Method IllustratedUnder the FIFO method, the first items purchased are assumed to be the first items soldThis leaves the most recently purchased items in ending inventory 42Copyright © Houghton Mifflin Company. All rights reserved.Effect of FIFO Method is to value the ending inventory at the most recent costs and include earlier costs in cost of goods soldDuring periods of consistently rising pricesFIFO yields the highest possible amount of net incomeCost of goods sold will show earliest, lower costs incurredDuring periods of consistently falling pricesFIFO yields the lowest possible amount of net incomeCost of goods sold will show most recent, higher costs incurredA major criticism of FIFO is that it magnifies the effects of the business cycle on income43Copyright © Houghton Mifflin Company. All rights reserved.Last-In, First-Out (LIFO) Method is based on the assumption that the costs of the last items acquired should be assigned to the first items soldThe cost of ending inventory reflects the cost of merchandise purchased earliestThe costs assigned to cost of goods sold are from the most recent purchases44Copyright © Houghton Mifflin Company. All rights reserved. LIFO Method IllustratedUnder the LIFO method, the last items purchased are assumed to be the first items soldThis leaves the earliest purchased items in ending inventory45Copyright © Houghton Mifflin Company. All rights reserved.Effect of LIFO Method is to value the ending inventory at the earlier costs and include most recent costs in cost of goods soldThis assumption does not agree with the actual physical movement of goods in most businessesCurrent value of inventory may be unrealisticBalance sheet measures (such as working capital and current ratio) may be distorted and must be interpreted carefully46Copyright © Houghton Mifflin Company. All rights reserved.Effect of LIFO Method (cont’d)Strong logical argument for LIFOFairest determination of income occurs if the current costs of merchandise are matched against current sales pricesSmoothes out fluctuations in the business cycleAs prices move upward or downward, cost of goods sold will show costs closer to the price level at the time the goods were sold47Copyright © Houghton Mifflin Company. All rights reserved.Summary of Cost Flow Assumptions’ Impact on Income Statement and Balance Sheet Using the Periodic Inventory System48Copyright © Houghton Mifflin Company. All rights reserved.DiscussionDo the FIFO and LIFO inventory methods result in different quantities of ending inventory?The quantities of ending inventory are the same under FIFO and LIFO. Thesemethods affect the pricing of theinventory, not the quantities49Copyright © Houghton Mifflin Company. All rights reserved.Pricing Inventory Under the Perpetual Inventory SystemObjective 4Apply the perpetual inventory system to the pricing of inventories at cost50Copyright © Houghton Mifflin Company. All rights reserved.Pricing Inventory Under the Perpetual Inventory SystemThe perpetual system records sales and purchase quantities and costs as they occurA continuous record of quantities and costs of merchandise is maintainedCost of goods sold is accumulated as sales are madeCosts are transferred from the Inventory account to the Cost of Goods Sold accountThe cost of ending inventory is the balance in the Inventory account51Copyright © Houghton Mifflin Company. All rights reserved.Pricing Inventory Under the Perpetual Inventory SystemAccountants use one of three methods to price inventoryAverage-cost methodFIFO methodLIFO method52Copyright © Houghton Mifflin Company. All rights reserved.Illustrative Data for the Three Perpetual Inventory MethodsThe same data is used as for the periodic system, except specific sales dates and amounts have been added 53Copyright © Houghton Mifflin Company. All rights reserved.Comparison of Periodic and Perpetual Inventory SystemsSpecific identification methodPricing inventory and cost of goods sold the same under both the periodic and perpetual systemsPerpetual system provides more detailed records of purchases and salesAverage-cost methodPeriodic systemAverage cost is computed for all goods available for sale during the periodPerpetual systemAverage is computed after each purchase or series of purchases54Copyright © Houghton Mifflin Company. All rights reserved. The ending inventory is the balance, or $282.70The sum of the costs applied to sales becomes the cost of goods sold, $342.30 Average-Cost Method55Copyright © Houghton Mifflin Company. All rights reserved.FIFO and LIFO MethodsIt is necessary to keep track of the components of inventory at each stepAs sales are made, the costs must be assigned in the proper order56Copyright © Houghton Mifflin Company. All rights reserved. Note that the ending inventory and cost of goods sold are the same as those computed under the FIFO periodic inventory systemThis will always occur because the ending inventory under both systems consists of the last items purchasedFIFO Method57Copyright © Houghton Mifflin Company. All rights reserved.Note that the ending inventory includes 30 units from beginning inventory, all the units from the June 13 purchase, and 40 units from the June 20 purchase LIFO Method58Copyright © Houghton Mifflin Company. All rights reserved.Summary of Cost Flow Assumptions’ Impact on Income Statement and Balance Sheet Using the Perpetual Inventory System59Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy do you think it is more expensive to maintain a perpetual inventory system?A perpetual inventory system is more expensive to maintain because detailed records must be kept as transactions occur. Also, businesses may need to purchase special equipment to assist in their perpetual recordkeeping efforts60Copyright © Houghton Mifflin Company. All rights reserved.Comparison and Impact of Inventory Decisions and MisstatementsObjective 5State the effects of inventory methods and misstatements of inventory on income determination, income taxes, and cash flows61Copyright © Houghton Mifflin Company. All rights reserved.During periods of rising pricesLIFO charges the most recent and highest prices to cost of goods sold resulting in the lowest gross margin under both systemsFIFO charges the earliest and lowest prices to cost of goods sold resulting in the highest gross margin under both systemsAverage-cost gross margin is between that using FIFO and LIFOHas a less pronounced effect on gross marginDuring periods of declining pricesThe reverse would occur Note that gross margin under FIFO is the same under both the periodic and perpetual systemsEffects of Inventory Systems and Methods62Copyright © Houghton Mifflin Company. All rights reserved.Effects on the Financial StatementsEach of the four methods of inventory pricing is acceptable for use in published financial statementsFactors to consider when choosing a methodThe trend of pricesThe effects on the financial statementsIncome taxes and management decisions63Copyright © Houghton Mifflin Company. All rights reserved.The LIFO Method is best suited for the income statement because it matches revenues and cost of goods soldNot the best measure of the current balance sheet value of inventoryParticularly during a prolonged period of price increases and decreases64Copyright © Houghton Mifflin Company. All rights reserved.The FIFO Method is best suited to the balance sheet because the ending inventory is closest to current valuesGives a more realistic view of the current financial assets of a businessDoes not provide as good a matching of current costs and revenues for income statement purposes65Copyright © Houghton Mifflin Company. All rights reserved.Effects on Income TaxesThe inventory valuation method chosen must be used consistently from year to yearMay change if there is a good reasonIf a company uses LIFO for tax purposes, the IRS requires the same method for financial reportingIRS will not allow lower-of-cost-or-market inventory valuation if LIFO is usedIf inventory at year end is less than at the beginning, LIFO liquidation results in higher income taxesA business wants to avoid paying income taxes on inventory profits66Copyright © Houghton Mifflin Company. All rights reserved.Effects on Income TaxesIn periods of rising prices Using the FIFO and average-cost methods May cause a business to report more than its true profit and pay more income taxesUsing LIFOFor balance sheet purposes, inventory may be valued at a cost far below current prices for the same itemsManagement must monitor this situation carefully because a LIFO liquidation might occurThe inventory quantity at year end falls below the beginning-of-the-year levelThe company will pay higher income taxes67Copyright © Houghton Mifflin Company. All rights reserved.Inventory Costing Methods Used by 600 Large Companies68Copyright © Houghton Mifflin Company. All rights reserved.Effects of Misstatements in Inventory MeasurementThe figures for ending inventory and gross margin are relatedA misstatement in the inventory figure will create misstatements of an equal amount on the financial statementsOn the income statement, gross margin and income before income taxes will be misstatedOn the balance sheet, assets and owner’s equity will be misstated69Copyright © Houghton Mifflin Company. All rights reserved.Effects of Misstatements Illustrated Effects of Misstatements Illustrated Total income for the two years is the same but the misstatements violate the matching ruleDecisions are based on net income for a period and the company has an obligation to present as useful a figure as possibleEffects of Misstatements from One Accounting Period to the Next72Copyright © Houghton Mifflin Company. All rights reserved.Inventory Measurement and Cash FlowsInventory methods affectReported profitabilityReported liquidity and cash flowsIn the case of large companies, the effects can be complex and material73Copyright © Houghton Mifflin Company. All rights reserved.DiscussionIf merchandise inventory is mistakenly overstated at the end of 20x4, what is the effect on the (a) 20x4 net income?A. (a) The 20x4 net income will be overstated (b) 20x4 year-end balance sheet value? (c) 20x5 net income? (d) 20x5 year-end balance sheet value? (b) The 20x4 year-end balance sheet value will also be overstated (c) The 20x5 net income will be understated (d) There will be no effect on the 20x5 year-end balance sheet value74Copyright © Houghton Mifflin Company. All rights reserved.Valuing Inventory at the Lower of Cost or Market (LCM)Objective 6Apply the lower-of-cost-or-market (LCM) rule to inventory valuation75Copyright © Houghton Mifflin Company. All rights reserved.The Lower-of-Cost-or-Market (LCM) Rule requires that when the replacement cost of inventory falls below historical cost, the inventory is written down to the lower value and a loss is recordedIs an application of conservatismA loss is recognized before an actual transaction takes placeLoss is recognized by writing the inventory down to market, or current replacement cost76Copyright © Houghton Mifflin Company. All rights reserved.Applying the LCM RuleInventory write-down can be done by two methodsItem-by-item methodCost and market values are compared for every item in inventoryEach item is valued at its lower priceMajor category methodThe total cost and total market values for each category of items are comparedEach category is valued at its lower amount77Copyright © Houghton Mifflin Company. All rights reserved.DiscussionIn the phrase lower of cost or market, what is meant by the word market?The word market in the phrase lower of cost or market refers to current replacement cost78Copyright © Houghton Mifflin Company. All rights reserved.Valuing Inventory by EstimationSupplemental Objective 7Estimate the cost of ending inventory using the retail method and gross profit method79Copyright © Houghton Mifflin Company. All rights reserved.Retail Method of Inventory Estimation estimates the cost of ending inventory by using the ratio of cost to retail priceUsed by retail merchandisersAs a cost and cost saving tool for determining the cost of inventory for preparing monthly financial statementsIt is common practice to take physical inventory from price tags and convert the total value to cost using the retail method 80Copyright © Houghton Mifflin Company. All rights reserved.Retail MethodEstimated Ending Inventory at Retail = (Beg. Inv. + Purchases) at Retail – Sales During Period The term at retail means the amount of inventory at the marked selling pricesTo use this method, the records must showBeginning inventory at cost and retailAmount of goods purchased during the period at cost and retail81Copyright © Houghton Mifflin Company. All rights reserved.Retail Method of Inventory Estimation82Copyright © Houghton Mifflin Company. All rights reserved.Gross Profit Method of Inventory Estimation a way of estimating the cost of inventory based on the assumption that the ratio of gross margin for a business remains relatively stable from year to yearAlso called gross margin methodIs used to estimate value of inventory lost in cases of fire, theft, or other hazards83Copyright © Houghton Mifflin Company. All rights reserved.Gross Profit MethodIs used in place of the retail method when records of the retail prices of beginning inventory and purchases are not keptIs acceptable for interim reportingIs not acceptable for annual financial statements84Copyright © Houghton Mifflin Company. All rights reserved.Gross Profit Method of Inventory Estimation85Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy is Freight In not placed under the Retail column when using the retail method of inventory valuation?Businesses automatically price their goods high enough to cover freight charges86Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewIdentify and explain the management issues associated with accounting for inventoriesDefine inventory cost and relate it to goods flow and cost flowCalculate the pricing of inventory, using the cost basis under the periodic inventory system87Copyright © Houghton Mifflin Company. All rights reserved.More ReviewApply the perpetual inventory system to the pricing of inventories at costState the effects of inventory methods and misstatements of inventory on income determination, income taxes, and cash flowsApply the lower-of-cost-or-market (LCM) rule to inventory valuation88Copyright © Houghton Mifflin Company. All rights reserved. And FinallyEstimate the cost of ending inventory using the retail method and gross profit method89Copyright © Houghton Mifflin Company. All rights reserved.