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TRANSCRIPT
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Inventory Cost Flow
• Identical units purchased at different unit costs during a period
• When units are sold, it is necessary to determine the cost of units sold.
• Cost of units sold can be determined using a cost flow assumption.
Units _________ Units ____
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Specific Identification
• If the merchandise can be identified with a specific purchase, the specific identification method can be used
• Each unit of merchandise can be identified with a specific purchase price
• Only practical if each unit has a unique identification number (e.g., VIN for an automobile)
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Three Inventory Methods
_______, _______(________)
_______, _______(________)
____________
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First-In, First-Out (FIFO)
• One unit is sold on May 30 for $20
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Last-In, First-Out (LIFO)
• One unit is sold on May 30 for $20
Balance Sheet
May 31
Purchases
May 10
May 18 May 24
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Average Cost
• One unit is sold on May 30 for $20
Balance Sheet
May 31
Purchases
May 10
May 18
May 24
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Learning Objective 7
Compare and contrast the use of the three inventory costing methods
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Comparing Methods - Rising Prices
METHOD I/S EFFECT B/S EFFECT RESULT
FIFO Lower COGS
Higher gross profit
Inventory shows replacement cost
Benefit lost in higher future costs
LIFO Higher COGS
Lower gross profit
Lower inventory values Matches current cost with current revenue
AVERAGE Average (middle) gross profit
Average inventory value Compromise between LIFO & FIFO
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Learning Objective 8
Describe three inventory cost flow assumptions and how they impact
the financial statements
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Balance Sheet PresentationExhibit 8: Receivables and Inventory in Balance Sheet
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Lower of Cost or Market
Exhibit 9: Determining Inventory at Lower of Cost or Market
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Reporting Receivables and Inventory
• Accounts Receivable• Classified as a _______ asset if collection is
expected within ________.
• Reported at _____ realizable value: _______ – _______________ _________________
• Inventory• Damaged inventory is reported at the _____
realizable value
• Net realizable value = _________ – _________________
• Reported at _______________________ (_____)
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End of Chapter 6