Professional Documents
Culture Documents
Coby Harmon
University of California, Santa Barbara
Westmont College
6-1
6 Inventories
Learning Objectives
After studying this chapter, you should be able to:
[2] Explain the accounting for inventories and apply the inventory cost flow
methods.
[3] Explain the financial effects of the inventory cost flow assumptions.
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Preview of Chapter 6
Accounting Principles
Eleventh Edition
Weygandt Kimmel Kieso
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Classifying Inventory
Merchandising Manufacturing
Company Company
One Classification: Three Classifications:
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(See page 324)
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Determining Inventory Quantities
Periodic System
1. Determine the inventory on hand.
Taken,
when the business is closed or business is slow.
at the end of the accounting period.
Review Question
Goods in transit should be included in the inventory of the
buyer when the:
Solution
1. Goods of $15,000 held on consignment should be deducted from the inventory
count.
2. The goods of $10,000 purchased FOB shipping point should be added to the
inventory count.
3. Item 3 was treated correctly. Inventory should be $195,000
($200,000 - $15,000 + $10,000).
6-13 LO 1
Advance slide in presentation LO 1 Determine how to classify
6-14 mode to reveal answer. inventory and inventory quantities.
Inventory Costing
6-15
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Inventory Costing
Illustration 6-3
6-16
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Inventory Costing
Specific Identification
If Crivitz sold the TVs it purchased on February 3 and May 22,
then its cost of goods sold is $1,500 ($700 + $800), and its ending
inventory is $750.
Illustration 6-4
6-17
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Inventory Costing
Specific Identification
Actual physical flow costing method in which items still in
inventory are specifically costed to arrive at the total cost of the
ending inventory.
6-18
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Inventory Costing
Cost Flow
Assumption
does not need to be
consistent with the
physical movement of
goods
Illustration 6-12
Use of cost flow methods in
major U.S. companies
6-19
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
Illustration 6-5
6-20
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
6-21
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
6-22
LO 2
Cost Flow Assumptions
6-23
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
6-24
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
6-25 LO 2
Cost Flow Assumptions
Illustration 6-8
6-26
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
Average-Cost
Allocates cost of goods available for sale on the basis of
weighted-average unit cost incurred.
6-27
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
Average-Cost
Illustration 6-11
6-28
LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
Average-Cost
Illustration 6-11
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LO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Financial Statement and Tax Effects
Comparative effects of cost flow methods Illustration 6-13
HOUSTON ELECTRONICS
Condensed Income Statements
6-31
Cost Flow Assumptions
Review Question
The cost flow method that often parallels the actual
physical flow of merchandise is the:
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.
Review Question
In a period of inflation, the cost flow method that results
in the lowest income taxes is the:
a. FIFO method.
Helpful Hint A tax rule,
b. LIFO method. often referred to as the LIFO
conformity rule, requires that
if companies use LIFO for tax
c. average cost method. purposes, they must also use it
for financial reporting purposes.
d. gross profit method. This means that if a company
chooses the LIFO method to
reduce its tax bills, it will also
have to report lower net income
in its financial statements.
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Inventory Costing
Lower-of-Cost-or-Market
When the value of inventory is lower than its cost
Companies write down the inventory to its market value in
the period in which the price decline occurs.
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LO 4 Explain the lower-of-cost-or-market
basis of accounting for inventories.
Inventory Costing
Lower-of-Cost-or-Market
Illustration: Assume that Ken Tuckie TV has the following lines
of merchandise with costs and market values as indicated.
Illustration 6-16
6-36
LO 4 Explain the lower-of-cost-or-market
basis of accounting for inventories.
Inventory Errors
Common Cause:
Failure to count or price inventory correctly.
Not properly recognizing the transfer of legal title to goods
in transit.
Errors affect both the income statement and balance sheet.
Illustration 6-18
Over the two years, the total net income is correct because
the errors offset each other.
Illustration 6-19
Question
Understating ending inventory will overstate:
a. assets.
c. net income.
d. owner's equity.
Illustration 6-20
Presentation
Balance Sheet - Inventory classified as current asset.
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Statement Presentation and Analysis
Analysis
Inventory management is a double-edged sword
1. High Inventory Levels - may incur high carrying costs
(e.g., investment, storage, insurance, obsolescence, and
damage).
HOUSTON ELECTRONICS
Astro Condensers
6-48 LO 7 Apply the inventory cost flow methods to perpetual inventory records.
Perpetual
APPENDIX 6A Cost Flow Methods Inventory
System
First-In, First-Out (FIFO) Illustration 6A-2
Cost of Goods
Ending Inventory
Sold
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LO 7 Apply the inventory cost flow methods to perpetual inventory records.
Perpetual
APPENDIX 6A Cost Flow Methods Inventory
System
Last-In, First-Out (LIFO) Illustration 6A-3
Cost of Goods
Ending Inventory
Sold
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LO 7 Apply the inventory cost flow methods to perpetual inventory records.
Perpetual
APPENDIX 6A Cost Flow Methods Inventory
System
Average-Cost
Illustration 6A-4
6-51 LO 7 Apply the inventory cost flow methods to perpetual inventory records.
APPENDIX 6B Estimating Inventories
Illustration 6B-2
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APPENDIX 6B Estimating Inventories
6-54 LO 8
APPENDIX 6B Estimating Inventories
Illustration 6B-1
Key Points
The requirements for accounting for and reporting inventories
are more principles-based under IFRS. That is, GAAP provides
more detailed guidelines in inventory accounting.
The definitions for inventory are essentially similar under IFRS
and GAAP. Both define inventory as assets held-for-sale in the
ordinary course of business, in the process of production for
sale (work in process), or to be consumed in the production of
goods or services (e.g., raw materials).
6-56 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
Key Points
Who owns the goodsgoods in transit or consigned goodsas
well as the costs to include in inventory, are accounted for the
same under IFRS and GAAP.
Both GAAP and IFRS permit specific identification where
appropriate. IFRS actually requires that the specific
identification method be used where the inventory items are
not interchangeable (i.e., can be specifically identified). If the
inventory items are not specifically identifiable, a cost flow
assumption is used. GAAP does not specify situations in which
specific identification must be used.
6-57 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
Key Points
A major difference between IFRS and GAAP relates to the
LIFO cost flow assumption. GAAP permits the use of LIFO for
inventory valuation. IFRS prohibits its use. FIFO and average-
cost are the only two acceptable cost flow assumptions
permitted under IFRS.
IFRS requires companies to use the same cost flow
assumption for all goods of a similar nature. GAAP has no
specific requirement in this area.
6-58 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
Key Points
In the lower-of-cost-or-market test for inventory valuation, IFRS
defines market as net realizable value. Net realizable value is
the estimated selling price in the ordinary course of business,
less the estimated costs of completion and estimated selling
expenses. GAAP, on the other hand, defines market as
essentially replacement cost.
6-59 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
Key Points
Under GAAP, if inventory is written down under the lower-of-
cost-or-market valuation, the new basis is now considered its
cost. As a result, the inventory may not be written back up to its
original cost in a subsequent period. Under IFRS, the write-
down may be reversed in a subsequent period up to the
amount of the previous write-down. Both the write-down and
any subsequent reversal should be reported on the income
statement as an expense. An item-by-item approach is
generally followed under IFRS.
6-60 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
Key Points
Unlike property, plant, and equipment, IFRS does not permit
the option of valuing inventories at fair value. As indicated
above, IFRS requires inventory to be written down, but
inventory cannot be written up above its original cost.
Similar to GAAP, certain agricultural products and mineral
products can be reported at net realizable value using IFRS.
IFRS allows companies to report inventory at standard cost if it
does not differ significantly from actual cost. Standard cost is
addressed in managerial accounting courses.
6-61 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
6-62 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
6-63 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
a) Specific identification.
b) FIFO.
c) LIFO.
d) Average-cost.
6-64 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
A Look at IFRS
6-65 LO 9 Compare the accounting procedures for inventories under GAAP and IFRS.
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