Kế toán tài chính 2 - Chapter 9: Arcounting for inventories

CHAPTER 9ACCOUNTING FOR INVENTORIESINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Goods included in inventoryCosts included in inventoryCost flow assumptionsInventory Classification and SystemsIssues in Inventory ValuationLIFO Special IssuesLower-of-Cost-or-MarketPresentation and AnalysisClassificationInventory systemsLIFO reserveLIFO liquidationDollar-value LIFOComparison of LIFO approachesBasis for selectionCeiling and floorHow LCM worksApplication of LCMEvaluation of rulePresentation of inventoriesAnalysis of inventoriesAccounting for InventoriesIdentify major classifications of inventory.Distinguish between perpetual and periodic inventory systems.Understand the items to include as inventory cost.Describe and compare the cost flow assumptions used to account for inventories.Explain the significance and use of a LIFO reserve.Understand the effect of LIFO liquidations.Explain the dollar-value LIFO method.Identify the major advantages and disadvantages of LIFO.Describe and apply the lower-of-cost-or-market rule. Explain how to report and analyze inventory.Learning ObjectivesInventories are:items held for sale, orgoods to be used in the production of goods to be sold.Inventory Classification and SystemsLO 1 Identify major classifications of inventory.ClassificationMerchandiserManufacturerBusinesses with inventory:orType of BusinessMerchandiser One inventory accountPurchase goods ready for saleInventory Classification and SystemsLO 1 Identify major classifications of inventory.Type of BusinessManufacturerThree accountsRaw materialsWork in processFinished goodsInventory Classification and SystemsLO 1 Identify major classifications of inventory.Two systems for maintaining inventory records:Inventory Classification and SystemsLO 2 Distinguish between perpetual and periodic inventory systems.Inventory SystemsPerpetual systemPeriodic systemFeatures:Inventory Classification and SystemsLO 2 Distinguish between perpetual and periodic inventory systems.Perpetual System Purchases of merchandise are debited to Inventory.Freight-in, purchase returns and allowances, and purchase discounts are recorded in Inventory.Cost of Goods Sold is debited and Inventory is credited for each sale.Physical count done to verify inventory balance.The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold.Features:Inventory Classification and SystemsLO 2 Distinguish between perpetual and periodic inventory systems.Periodic System Purchases of merchandise are debited to Purchases.Ending Inventory determined by physical count.Calculation of cost of goods sold:Beginning inventory $ 100,000Purchases, net 800,000Goods available for sale 900,000Ending inventory 125,000Cost of goods sold $ 775,000Inventory Classification and SystemsLO 2 Distinguish between perpetual and periodic inventory systems.Perpetual System Periodic System vs. Requires the following:Basic Issues in Inventory ValuationLO 2 Distinguish between perpetual and periodic inventory systems.Valuation of InventoriesThe physical goods (goods on hand, goods in transit, consigned goods, special sales agreements).The costs to include (product vs. period costs).The cost flow assumption (FIFO, LIFO, Average cost, Specific Identification, Retail, etc.).A company should record purchases when it obtains legal title to the goods.Physical Goods Included in InventoryLO 2 Distinguish between perpetual and periodic inventory systems.Physical GoodsSpecial Consideration:Goods in transit (FOB shipping point, FOB destination)Consigned goodsCosts Included in InventoryLO 3 Understand the items to include as inventory cost.Product Costs - costs directly connected with bringing the goods to the buyer’s place of business and converting such goods to a salable condition.Period Costs – generally selling, general, and administrative expenses.Answer: Method adopted should be one that most clearly reflects periodic income.Cost Flow Assumption AdoptedPhysical Movement of Goodsdoes not need to equalFIFOWhat Cost Flow Assumption to Adopt?LIFOAverage CostSpecific IdentificationLO 4 Describe and compare the cost flow assumptions used to account for inventories.Young & Crazy Company makes the following purchases:One item on 2/2/07 for $10One item on 2/15/07 for $15One item on 2/25/07 for $20Young & Crazy Company sells one item on 2/28/08 for $90. What would be the balance of ending inventory and cost of goods sold for the month ended Feb. 2008, assuming the company used the FIFO, LIFO, Average Cost, and Specific Identification cost flow assumptions? Assume a tax rate of 30%.ExampleCost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Purchase on 2/25/08 for $20Inventory Balance = $ 45Young & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40Cost Flow Assumptions“First-In-First-Out (FIFO)”LO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Purchase on 2/25/08 for $20Cost Flow AssumptionsInventory Balance = $ 35Young & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 10 Gross profit 80 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 47 Taxes 14 Net Income $ 33“First-In-First-Out (FIFO)”LO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Purchase on 2/25/08 for $20Inventory Balance = $ 45Young & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40Cost Flow Assumptions“Last-In-First-Out (LIFO)”LO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Cost Flow AssumptionsInventory Balance = $ 25Purchase on 2/25/08 for $20Young & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 20 Gross profit 70 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 37 Taxes 11 Net Income $ 26“Last-In-First-Out (LIFO)”LO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Purchase on 2/25/08 for $20Inventory Balance = $ 45Young & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40Cost Flow Assumptions“Average Cost”LO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Purchase on 2/25/08 for $20Inventory Balance = $ 30Cost Flow AssumptionsYoung & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 15 Gross profit 75 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 42 Taxes 12 Net Income $ 30“Average Cost”LO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Purchase on 2/25/08 for $20Inventory Balance = $ 45Young & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40Cost Flow Assumptions“Specific Identification”LO 4 Describe and compare the cost flow assumptions used to account for inventories.Purchase on 2/2/08 for $10Purchase on 2/15/08 for $15Purchase on 2/25/08 for $20Inventory Balance = $ 45Young & Crazy CompanyIncome StatementFor the Month of Feb. 2008 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40Cost Flow Assumptions“Specific Identification”Depends which one is soldLO 4 Describe and compare the cost flow assumptions used to account for inventories.Financial Statement Summary Inventory Balance302535Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Inventory information for Part 686 for the month of June.June 1 Beg. Balance 300 units @ $10 = $ 3,000 10 Sold 200 units @ $24 11 Purchased 800 units @ $12 = 9,600 15 Sold 500 units @ $25 20 Purchased 500 units @ $13 = 6,500 27 Sold 300 units @ $27Example – Perpetual and Periodic MethodsCost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Assuming the Perpetual Inventory Method, compute the Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Average cost.Assuming the Periodic Inventory Method, compute the Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Average cost.Goods Available $19,100Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Perpetual InventoryFIFO Method+Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Perpetual InventoryLIFO Method+Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Perpetual InventoryMoving AverageCost per unit sold is determined by dividing total inventory $ by total units on hand after each purchase.+Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Perpetual InventoryMoving AverageCost per unit sold is determined by dividing total inventory $ by total units on hand after each purchase.+Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Periodic InventoryFIFO Method+Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Periodic InventoryLIFO Method+Cost Flow AssumptionsLO 4 Describe and compare the cost flow assumptions used to account for inventories.Periodic InventoryWeighted Average+Many companies use LIFO for tax and external financial reporting purposes FIFO, average cost, or standard cost system for internal reporting purposes.Reasons:Special Issues Related to LIFOLO 5 Explain the significance and use of a LIFO reserve.LIFO ReservePricing decisionsRecord keeping easierProfit-sharing or bonus arrangementsLIFO troublesome for interim periodsSpecial Issues Related to LIFOLO 5 Explain the significance and use of a LIFO reserve.LIFO Reserve is the difference between the inventory method used for internal reporting purposes and LIFO. Example:FIFO value per books $160,000LIFO value 145,000LIFO Reserve $ 15,000Cost of Goods Sold 15,000 LIFO Reserve 15,000Journal entry to reduce inventory to LIFO:Companies should disclose either the LIFO reserve or the replacement cost of the inventory.Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes. Special Issues Related to LIFOLO 6 Understand the effect of LIFO liquidations.LIFO LiquidationIllustration 9-13Changes in a pool are measured in terms of total dollar value, not physical quantity.Advantage:Broader range of goods in pool.Permits replacement of goods that are similar.Helps protect LIFO layers from erosion.Special Issues Related to LIFOLO 7 Explain the dollar-value LIFO method.Dollar-Value LIFOSpecial Issues Related to LIFOLO 7 Explain the dollar-value LIFO method.Exercise: The following information relates to the Jimmy Johnson Company.Use the dollar-value LIFO method to compute the ending inventory for 2003 through 2005. Dollar-Value LIFOSpecial Issues Related to LIFOLO 7 Explain the dollar-value LIFO method.Exercise SolutionSpecific-goods LIFO - costing goods on a unit basis is expensive and time consuming.Specific-goods Pooled LIFO approachReduces record keeping and clerical costs.More difficult to erode the layers.Using quantities as measurement basis can lead to untimely LIFO liquidations.Dollar-value LIFO is used by most companies.Special Issues Related to LIFOLO 7 Explain the dollar-value LIFO method.Comparison of LIFO ApproachesLIFO is generally preferred:if selling prices are increasing faster than costs andif a company has a fairly constant “base stock.”Basis for Selection of Inventory MethodLIFO not appropriate:if prices tend to lag behind costs, if specific identification traditionally used, and when unit costs tend to decrease as production increases.LO 7 Explain the dollar-value LIFO method.MatchingTax benefits/Improved cash flowLO 8 Identify the major advantages and disadvantages of LIFO.AdvantagesReduced earningsInventory understatedPhysical flowInvoluntary liquidation / Poor buying habitsDisadvantagesBasis for Selection of Inventory MethodMarket = Replacement costLower of cost or replacement costLoss should be recorded when loss occurs, not in the period of sale.A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost.Lower-of-Cost-or-MarketLO 9 Describe and apply the lower-of-cost-or-market rule.LCMDecline in the RC usually = decline in selling price.RC allows a consistent rate of gross profit.If reduction in RC fails to indicate reduction in utility, then two additional valuation limitations are used: Ceiling - Net realizable value andFloor - Net realizable value less a normal profit margin.Why use Replacement Cost (RC) for Market?Lower-of-Cost-or-MarketLO 9 Describe and apply the lower-of-cost-or-market rule.Ceiling and FloorNotIllustration 9-21Ceiling – prevents overstatement of the value of obsolete, damaged, or shopworn inventories.Floor – deters understatement of inventory and overstatement of the loss in the current period.Lower-of-Cost-or-MarketLO 9 Describe and apply the lower-of-cost-or-market rule.Rationale for LimitationsLower-of-Cost-or-MarketLO 9 Describe and apply the lower-of-cost-or-market rule.How LCM Works (Individual Items)Illustration 9-23Lower-of-Cost-or-MarketLO 9 Describe and apply the lower-of-cost-or-market rule.Methods of Applying LCMIllustration 9-24Exercise: Grant Wood Company manufactures desks. The company attempts to obtain a 20% gross margin on selling price. At December 31, 2008, the following finished desks appear in the company’s inventory.Instructions:At what amount should the desks appear in the company’s December 31, 2008, inventory, assuming that the company has adopted a lower-of-cost-or-market approach for valuation of inventories on an individual-item basis?Lower-of-Cost-or-MarketLO 9 Describe and apply the lower-of-cost-or-market rule.NotNotNotNotExpense recorded when loss in utility occurs. Profit on sale recognized at the point of sale.Inventory valued at cost in one year and at market in the next year.Net income in year of loss is lower. Net income in subsequent period may be higher than normal if expected reductions in sales price do not materialize.LCM uses a “normal profit” in determining inventory values, which is a subjective measure. Some Deficiencies:Lower-of-Cost-or-MarketLO 9 Describe and apply the lower-of-cost-or-market rule.Evaluation of LCM RuleAccounting standards require disclosure of:Presentation and AnalysisLO 10 Explain how to report and analyze inventory.Presentation:composition of the inventory, financing arrangements, and costing methods employed.Common ratios used in the management and evaluation of inventory levels are inventory turnover and average days to sell the inventory.Analysis:Measures the number of times on average a company sells the inventory during the period. Presentation and AnalysisLO 10 Explain how to report and analyze inventory.Inventory Turnover RatioIllustration 9-27Measure represents the average number of days’ sales for which a company has inventory on hand.Presentation and AnalysisLO 10 Explain how to report and analyze inventory.Average Days to Sell Inventory365 days / 8 times = every 45.6 daysInventory TurnoverAverage Days to SellIllustration 9-27Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. 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