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Lecture Financial accounting: Information for decisions (7/e): Chapter 5 - John J. Wild

Chapter 5 - Reporting and analyzing inventories. After studying this chapter you will be able to: Identify the items making up merchandise inventory, identify the costs of merchandise inventory, analyze the effects of inventory methods for both financial and tax reporting, analyze the effects of inventory errors on current and future financial statements, assess inventory management using both inventory turnover and days’ sales in inventory. | Financial Accounting John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 5 Reporting and Analyzing Inventories Determining Inventory Items Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include: Goods in Transit Goods Damaged or Obsolete Goods on Consignment C1 5- Inventory Cost Flow Assumptions First-In, First-Out (FIFO) Assumes costs flow in the order incurred. Last-In, First-Out (LIFO) Assumes costs flow in the reverse order incurred. Weighted Average Assumes costs flow at an average of the costs available. P1 5- Financial Statement Effects of Costing Methods Because prices change, inventory methods nearly always assign different cost amounts. A1 5- Financial Statement Effects of Costing Methods Advantages of Methods Smoothes out price changes. Better matches current costs in cost of goods sold with revenues. Ending inventory approximates current replacement cost. First-In, First-Out Weighted Average Last-In, First-Out A1 5- Lower of Cost or Market Inventory must be reported at market value when *market is lower than cost. LCM can be applied three ways: (1) separately to each individual item. (2) to major categories of items. (3) to the whole inventory. *Market is defined as current replacement cost (not sales price). Consistent with the conservatism constraint. P2 5- Financial Statement Effects of Inventory Errors Income Statement Effects A2 5- My ending inventory count was understated! Well, that messed up my reported income! Financial Statement Effects of Inventory Errors Balance Sheet Effects A2 5- End of Chapter 5 5- | Financial Accounting John J. Wild Seventh Edition Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 5 Reporting and Analyzing Inventories Determining Inventory Items Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include: Goods in Transit Goods Damaged or Obsolete Goods on Consignment C1 5- Inventory Cost Flow Assumptions First-In, First-Out (FIFO) Assumes costs flow in the order incurred. Last-In, First-Out (LIFO) Assumes costs flow in the reverse order incurred. Weighted Average Assumes costs flow at an average of the costs available. P1 5- Financial Statement Effects of Costing Methods Because prices change, inventory methods nearly always assign different cost amounts. A1 5- Financial Statement Effects of