Intermediate accounting 17e by kieso ch08

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Intermediate accounting 17e by kieso ch08

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Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter Valuation of Inventories: A Cost-Basis Approach This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Identify inventory classifications and different inventory systems Determine the goods and costs included in inventory Describe and compare the cost flow assumptions used to account for inventories Identify special issues related to LIFO Determine the effects of inventory errors on the financial statements Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Valuation of Inventories: A Cost-Basis Approach Inventory Issues • Classification • Cost flow • Control • Cost of goods sold Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Goods and Costs Included in Inventory • Goods included • Costs included Cost Flow Assumptions • Specific identification • Average-cost • FIFO • LIFO Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter L I F O: Special Issues • L I F O reserve • L I F O liquidation • Dollar-value L I F O • Comparison of L I F O approaches • Advantages and disadvantages • Basis for selection Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter Effect of Inventory Errors • Ending inventory misstated Purchases and inventory misstated Copyright â2019 John Wiley & Sons, Inc Learning Objective 1: Identify Inventory Classifications and Different Inventory Systems LO Copyright ©2019 John Wiley & Sons, Inc Inventory Issues Classification Inventories are asset: • items held for sale in ordinary course of business, or • goods to be used in production of goods to be sold Businesses with Inventory Merchandiser LO or Copyright ©2019 John Wiley & Sons, Inc Manufacturer Inventory Issues Merchandising Company Classification • One inventory account • Purchase merchandise in a form ready for sale LO Copyright ©2019 John Wiley & Sons, Inc Inventory Issues Manufacturing Company Three accounts LO • Raw Materials • Work in Process Finished Goods Copyright â2019 John Wiley & Sons, Inc 10 Dollar-Value LIFO Selecting a Price Index Many companies use the general price-level index that the federal government publishes each month LO • Most popular is Consumer Price Index for Urban Consumers (CPI-U) • Companies also use more-specific external price indexes • Company may compute its own specific internal price index Copyright ©2019 John Wiley & Sons, Inc 52 Comparison of LIFO Approaches • Specific-goods LIFO - costing goods on a unit basis is expensive and time consuming • Specific-goods pooled LIFO approach • LO  Reduces record keeping and clerical costs  More difficult to erode layers  Using quantities as measurement basis can lead to untimely LIFO liquidations Dollar-value LIFO is used by most companies Copyright ©2019 John Wiley & Sons, Inc 53 Major Advantages of LIFO • Matching • Tax Benefits/Improved Cash Flow • Future Earnings Hedge Major Disadvantages of LIFO LO • Reduced Earnings • Inventory Understated • Physical Flow • Involuntary Liquidation / Poor Buying Habits Copyright ©2019 John Wiley & Sons, Inc 54 Reasons Companies Reject LIFO LO Copyright ©2019 John Wiley & Sons, Inc 55 Basis for Selection of Inventory Method LIFO is generally preferred: If selling prices and revenues are increasing faster than costs and If a company has a fairly constant “base stock.” LIFO is not appropriate: LO Where prices tend to lag behind costs If specific identification is traditionally used Where unit costs tend to decrease as production increases Copyright ©2019 John Wiley & Sons, Inc 56 Basis for Selection of Inventory Method Tax consequences are another consideration • Switching from FIFO to LIFO usually results in an immediate tax benefit • Concern about reduced income resulting from adoption of LIFO has even less substance now as IRS has relaxed LIFO conformity rule • LO Companies are able to disclose FIFO income numbers in financial reports Copyright ©2019 John Wiley & Sons, Inc 57 Inventory Methods Summary Analysis Comparative Results LO Copyright ©2019 John Wiley & Sons, Inc 58 Inventory Methods Summary Analysis Balances of Selected Items LO Copyright ©2019 John Wiley & Sons, Inc 59 Learning Objective Determine the Effects of Inventory Errors on the Financial Statements LO Copyright ©2019 John Wiley & Sons, Inc 60 Effects of Inventory Errors Ending Inventory Misstated Income Statement Balance Sheet Inventory Understated Retained earnings Understated Working capital Understated Current ratio Understated Cost of goods sold Overstated Net income Understated The effect of an error on net income in one year will be counterbalanced in the next, however the income statement will be misstated for both years LO Copyright ©2019 John Wiley & Sons, Inc 61 Ending Inventory Misstated Illustration To illustrate the effect on net income over a two-year period (2019–2020), assume that Jay Weiseman Corp understates its ending inventory by $10,000 in 2019; all other items are correctly stated The effect of this error is to decrease net income in 2019 and to increase net income in 2020 The error is counterbalanced (offset) in 2020 because beginning inventory is understated and net income is overstated The following illustration shows that the income statement misstates the net income figures for both 2019 and 2020 although the total for the two years is correct LO Copyright ©2019 John Wiley & Sons, Inc 62 Ending Inventory Misstated LO Copyright ©2019 John Wiley & Sons, Inc 63 Purchases and Inventory Misstated Balance Sheet Income Statement Inventory Understated Purchases Overstated Retained earnings No effect Cost of goods sold No effect Accounts payable Understated Net income No effect Working capital No effect Inventory (ending) Understated Current ratio Overstated The understatement does not affect cost of goods sold and net income because the errors offset one another LO Copyright ©2019 John Wiley & Sons, Inc 64 Purchases and Inventory Misstated Illustration Assume that Bishop understated accounts payable and ending inventory by $40,000 The following illustrations shows the understated and correct data LO Copyright ©2019 John Wiley & Sons, Inc 65 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Copyright ©2019 John Wiley & Sons, Inc 66 ... Flow Periodic System Purchases of merchandise are debited to Purchases Ending Inventory determined by physical count Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Purchases, net... Sons, Inc 17 Inventory Control All companies need periodic verification of the inventory records • By actual count, weight, or measurement • With counts compared with detailed inventory records Companies... • Near the end of their fiscal year, • To properly report inventory quantities in their annual accounting reports Copyright ©2019 John Wiley & Sons, Inc 18 Determining Cost of Goods Sold Companies

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Mục lục

  • Intermediate Accounting

  • Learning Objectives

  • Slide 3

  • Preview of Chapter 8 Goods and Costs Included in Inventory

  • Preview of Chapter 8 L I F O: Special Issues

  • Preview of Chapter 8 Effect of Inventory Errors

  • Slide 7

  • Inventory Issues Classification

  • Inventory Issues Merchandising Company

  • Inventory Issues Manufacturing Company

  • Flow of Costs

  • Inventory Cost Flow

  • Inventory Cost Flow Perpetual System

  • Inventory Cost Flow Periodic System

  • Inventory Cost Flow Comparing Perpetual and Periodic System

  • Comparative Entries

  • Inventory Cost Flow Illustration

  • Inventory Control

  • Determining Cost of Goods Sold

  • Slide 20

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