Chapter 5 - Inventories and cost of sales. After completing this chapter, students 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 and Managerial Accounting Wild, Shaw, and Chiappetta Fourth Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 5 Inventories and Cost of Sales Conceptual Chapter Objectives C1: Identify the items making up merchandise inventory. C2: Identify the costs of merchandise inventory. 5- Analytical Chapter Objectives A1: Analyze the effects of inventory methods for both financial and tax reporting. A2: Analyze the effects of inventory errors on current and future financial statements. A3: Assess inventory management using both inventory turnover and days’ sales in inventory. 5- Procedural Chapter Objectives P1: Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average. P2: Compute the lower of cost or market amount of inventory. P3: Appendix 5A – Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average (see text for details). P4: Appendix 5B – Apply both the retail inventory and gross profit methods to estimate inventory (see text for details). 5- 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 C 1 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. Can be applied three ways: (1) separately to each individual item. (2) to major categories of assets. (3) to the whole inventory. Defined as current replacement cost (not sales price). Consistent with the conservatism principle. P2 5- Financial Statement Effects of Inventory Errors Income Statement Effects A2 5- Financial Statement Effects of Inventory Errors Balance Sheet Effects A2 5- End of Chapter 5 5-
