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An electronic presentationAn electronic presentationBy Norman SundermanBy Norman Sundermanand Kenneth Buchananand Kenneth BuchananAngelo State University
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Flow of Inventory Costs
Merchandising CompanyMerchandising Company
Cost of Goods Sold
Accounts Payable (or Cash)
Merchandise Inventory
Goods Purchased
Goods Sold
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Manufacturing CompanyManufacturing Company
Accounts Payable (or Cash)
Raw Materials Inventory
Materials Purchased
Materials Used in
Production
To Work in Process Inventory
ContinuedContinuedContinuedContinued
Flow of Inventory Costs
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Direct Labor
Actual Direct Labor
Manufacturing (Factory) Overhead
Actual Mfg. Over-head Overhead Applied
to Production
To Work in Process Inventory
Labor Charged to Production
To Work in Process Inventory
ContinuedContinuedContinuedContinued
Flow of Inventory Costs
Manufacturing CompanyManufacturing Company
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Work in Process Inventory
Materials Used
Direct Labor
Overhead Applied
Finished Goods Inventory
Goods Finished (Manufactured)
Goods Sold to Cost of Goods Sold
Flow of Inventory Costs
Manufacturing CompanyManufacturing Company
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Alternative Inventory Systems
A company using a perpetual system maintains a continuous record of the physical quantities
in its inventory.
A company using a perpetual system maintains a continuous record of the physical quantities
in its inventory.
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A company using a periodic system does not maintain a
continuous record of the physical quantities of inventory on hand.
A company using a periodic system does not maintain a
continuous record of the physical quantities of inventory on hand.
Under the gross price method, a company records the purchase at the gross price and records the amount of the discount in the accounting system only if the discount is
taken.
Under the gross price method, a company records the purchase at the gross price and records the amount of the discount in the accounting system only if the discount is
taken.
Under the net price method, a company records the purchase at its net price and records the amount of the discount in the
accounting system only if the discount is not taken.
Under the net price method, a company records the purchase at its net price and records the amount of the discount in the
accounting system only if the discount is not taken.
Purchases Discounts
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If the company does not pay promptly, it is forfeiting 2% in order to keep the money for an additional 20
days.
If the company does not pay promptly, it is forfeiting 2% in order to keep the money for an additional 20
days.
A company purchases $1,000 of goods under terms of 2/10, n/30. What is the annual discount rate?
A company purchases $1,000 of goods under terms of 2/10, n/30. What is the annual discount rate?
The company can forfeit this discount 18 times during a year. (360 days/20 additional each time =
18)
The company can forfeit this discount 18 times during a year. (360 days/20 additional each time =
18)
Annual Rate on Discounts
2% forfeited 18 times equals an annual interest rate of 36%
2% forfeited 18 times equals an annual interest rate of 36%
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Specific Identification
100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unit
70 units @ $12 per unit
On April 27, 90 units were sold from the beginning inventory and 50 units from the
April 10 purchase.
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Specific Identification
100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unit
Apr. 20 0 units @ $12 per unit
90 units @ $10 per unitApr. 1
50 units @ $11 per unitApr. 10
70 units @ $12 per unit
10 units @ $10 per unit
30 units @ $11 per unit
70 units @ $12 per unit
Sold 90
Sold 50
Ending Inventory…………
= $ 100
= 330
= 840
$1,270
Cost of Goods Sold………. $1,450
= $ 900
= 550
= 0
Sold 0
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Specific Identification
100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
30 units @ $11 per unit
Apr. 20
Apr. 1
Apr. 10
70 units @ $12 per unit
10 units @ $10 per unit
80 units @ $11 per unit
70 units @ $12 per unitEnding Inventory…………
Goods Available for Sale…
= $ 1,000
= 880
= 840
$2,720
= $ 100
= 330
= 840
$1,270Cost of Goods Sold…………. $1,480Cost of Goods Sold………..
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100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unit
Sold 140 units during April
40 units @ $11 per unit
Sold all0 units @ $10 per unit
Sold 40
Sold 070 units @ $12 per unit
First-In, First-Out (FIFO)
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Ending Inventory…………
100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unit40 units @ $11 per unit
0 units @ $10 per unit
70 units @ $12 per unit
Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
= $ 0
= 440
= 840
$1,280
$1,000 + $1,720 – $1,280 = $1,440
First-In, First-Out (FIFO)
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The ending inventory and the cost of goods sold under perpetual and periodic FIFO are
identical.
The ending inventory and the cost of goods sold under perpetual and periodic FIFO are
identical.
First-In, First-Out (FIFO)
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= $1,000
= 880
= 840
$2,720
Average Cost
100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unit
70 units @ $12 per unit
Sold 140 units during April
250 units
Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
$2,720 250 units = $10.88
$10.88 × 110 units = Ending Inventory of $1,197
$1,000 + $1,720 – $1,197 = $1,523
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$1,780 $1,780 160 160
Apr. 18 Sales (90) units @ $10.44 (940)Apr. 18 Balance 90 units @ $10.44 $ 940Apr. 20 Purchases 70 units @ $12 840Apr. 20 Balance 160 units @ $11.125 $1,780
Moving Average
Apr. 1 Beginning Inventory 100 units @ $10 $1,000Apr. 10 Purchases 80 units @ $11 880Apr. 10 Balance 180 units @ $10.44 $1,880
Apr. 27 Sales (50) units @ $11.125 (556)Apr. 30 Balance 110 units @ $11.125 $1,224
Cost of Goods Sold (140 units) $940 + $556 $1,496Ending Inventory (110 units @ $11.125) $1,224
$1,880 $1,880 180 180$1,880 $1,880 180 180
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Last-In, First-Out (LIFO)
100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unit
Sold 140 units during April
10 units @ $11 per unit
Sold 0
Sold 70Sold all70 units @ $12 per unit
Periodic Inventory SystemPeriodic Inventory System
0 units @ $12 per unit
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Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
100 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unit10 units @ $11 per unit70 units @ $12 per unit
Periodic Inventory SystemPeriodic Inventory System
0 units @ $12 per unit
Ending Inventory…………
= $1,000
= 110
= 0
$1,110
Last-In, First-Out (LIFO)
$1,000 + $1,720 – $1,110 = $1,610
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100 units @ $10 per unit90 units @ $10 per unitApr. 1
Apr. 10
Apr. 20
80 units @ $11 per unitPurchased 80
70 units @ $12 per unit
Perpetual Inventory SystemPerpetual Inventory System
Sold 8080 units @ $11 per unit0 units @ $11 per unit
Sold 10
Purchased 70Sold 50
Last-In, First Out (LIFO)
Sold 90 units during April
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Apr. 1
Apr. 10
Apr. 20
Perpetual Inventory SystemPerpetual Inventory System
Ending Inventory…………
Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
= $ 900
= 0
= 240
$1,140
$1,000 + $1,720 – $1,140 = $1,580
90 units @ $10 per unit
0 units @ $11 per unit
20 units @ $12 per unit
Last-In, First Out (LIFO)
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Cost of Goods Cost of Available Goods Ending for Sale Sold Inventory
Cost Flow Assumption and MethodFIFO, periodic $2,720 $1,440 $1,280FIFO, perpetual 2,720 1,440 1,280Weighted average 2,720 1,523 1,197Moving average 2,720 1,496 1,224LIFO, periodic 2,720 1,610 1,110LIFO, perpetual 2,720 1,580 1,140
Comparison of Inventory Assumptions
Holding Gains Comparisons
FIFO matches the oldest cost with revenue.FIFO matches the oldest cost with revenue.
LIFO matches the most recent cost with revenue.LIFO matches the most recent cost with revenue.
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10,000 units @ $20 per unit
6,000 units @ $22 per unit
8,000 units @ $24 per unit
4,000 units @ $30 per unit
= $200,000
= 132,000
= 192,000
= 120,000
$644,000Inventory, Jan. 1, 2010…..
In 2010 the company purchases 50,000 units at $35 per unit but sells 60,000 units.
In 2010 the company purchases 50,000 units at $35 per unit but sells 60,000 units.
2006:
2007:
2008:
2009:
Liquidation of LIFO Layers
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10,000 units @ $20 per unit
6,000 units @ $22 per unit
8,000 units at $24 per unit
4,000 units at $30 per unit
2006:
2007:
2008:
2009:
2010:
= $ 200,000
= 132,000
= 192,000
= 120,000
= $1,750,00050,000 units at $35 per unit0 units @ $35 per unitSold 4,000Sold 4,000
Sold 6,000Sold 6,0000 units @ $30 per unit
2,000 units @ $24 per unit
Liquidation of LIFO Layers
In 2010 the company purchases 50,000 units at $35 per unit and sells 60,000 units.
In 2010 the company purchases 50,000 units at $35 per unit and sells 60,000 units.
Sold 50,000Sold 50,000
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10,000 units @ $20 per unit
6,000 units @ $22 per unit
6,000 units @ $24 per unit
4,000 units @ $30 per unit
2006:
2007:
2008:
= $ 144,000
= 120,000
= 1,750,000
$2,014,00050,000 units @ $35 per unit
2,000 units @ $24 per unit
2008:
2009:
2010:Cost of Goods Sold………..
Liquidation of LIFO Layers
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1. The LIFO method requires a company to keep numerous detailed records.
2. Fluctuations in the physical quantities of similar inventory items may occur.
3. As technological changes take place, inventory made up with one material is replaced by inventory made with substitute materials, or an outdated design is replaced by a newer design.
Difficulties in Applying Simple LIFO
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Step 1: Value the total ending inventory at current-year costs.
01/01/09 $10,000
12/31/09 $12,100
12/31/10 $13,125
12/31/11 $16,800
12/31/12 $12,360
Dollar-Value LIFO
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Step 2: Convert the ending inventory cost to base-year costs.
12/31/09 $12,100
12/31/10 $13,125
12/31/11 $16,800
12/31/12 $12,360
Ending Inventory at
Current Costs×
Base-Year Cost Index
Current Cost Index
× 100/110 = $11,000
12/31/0912/31/09
Dollar-Value LIFO
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Step 3: Compute the change in the inventory level for the year at base-year costs.
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
$11,000 $11,000 –– $10,000 $10,000
$1,000$1,000
1/1/0912/31/0912/31/09
Dollar-Value LIFO
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Step 4a: If there is an increase in the inventory levels at base-year costs, convert this increase to current-year costs.
Base year, $10,000Base year, $10,000Base year, $10,000Base year, $10,000
$1,000$1,000$1,000$1,000
12/31/0912/31/09
× 110/100 = $ 1,100
× 100/100 = 10,000$11,100
Ending inventory, 12/31/09
Dollar-Value LIFO
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Step 2: Convert the ending inventory cost to base-year costs.
12/31/09 $12,100
12/31/10 $13,125
12/31/11 $16,800
12/31/12 $12,360
Ending Inventory at
Current Costs×
Base-Year Cost Index
Current Cost Index
× 100/110 = $11,000
× 100/125 = $10,500
12/31/1012/31/10
Dollar-Value LIFO
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Step 3: Compute the change in the inventory level for the year at base-year costs.
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
12/31/1012/31/10
$1,000$1,000
$11,000 – $10,500
Dollar-Value LIFO
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Step 3: Compute the change in the inventory level for the year at base-year costs.
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
12/31/1012/31/10
$500$500
Dollar-Value LIFO
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Step 4b: If there is a decrease in the inventory levels at base-year costs, this decrease reduces the inventory.
Base year, $10,000Base year, $10,000
$500$500
12/31/1012/31/10
× 110/100 = $ 550
× 100/100 = 10,000$10,550
Ending inventory, 12/31/10
Dollar-Value LIFO
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Step 2: Convert the ending inventory cost to base-year costs.
12/31/09 $12,100
12/31/10 $13,125
12/31/11 $16,800
12/31/12 $12,360
× 110/100 = $11,000
× 100/125 = $10,500
× 100/140 = $12,000
12/31/1112/31/11
Dollar-Value LIFO
Ending Inventory at
Current Costs×
Base-Year Cost Index
Current Cost Index
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Step 3: Compute the change in the inventory level for the year at base-year costs.
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
12/31/1112/31/11
$500$500$12,000 – $10,500 = $1,500
Dollar-Value LIFO
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$500$500
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
12/31/1112/31/11
$1,500$1,500
Step 3: Compute the change in the inventory level for the year at base-year costs.
Dollar-Value LIFO
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Step 4a: If there is an increase in inventory levels at base-year costs, convert this increase to current-year costs.
Base year, $10,000Base year, $10,000
12/31/1112/31/11
× 140/100 = $ 2,100
× 110/100 = 550
× 100/100 = 10,000$12,650
Ending inventory, 12/31/11
$500$500
$1,500$1,500
Dollar-Value LIFO
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Step 2: Convert the ending inventory cost to base-year costs.
12/31/09 $12,100
12/31/10 $13,125
12/31/11 $16,800
12/31/12 $12,360
× 110/100 = $11,000
× 100/125 = $10,500
× 100/140 = $12,000
× 100/120 = $10,300
12/31/1212/31/12
Dollar-Value LIFO
Ending Inventory at
Current Costs×
Base-Year Cost Index
Current Cost Index
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$500$500
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
12/31/1212/31/12
$1,500$1,500
Dollar-Value LIFO
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$500$500
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
12/31/1212/31/12
Dollar-Value LIFO
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$300$300
$11,000
$10,500
$12,000
$10,300
12/31/09
12/31/10
12/31/11
12/31/12
Base year, $10,000Base year, $10,000
12/31/1212/31/12
Dollar-Value LIFO
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Step 4a: If there is an increase in the inventory levels at base-year costs, convert this increase to current-year costs.
Base year, $10,000Base year, $10,000
12/31/1212/31/12
× 110/100 = $ 330
× 100/100 = 10,000$10,330
Ending inventory, 12/31/12
$300$300
Dollar-Value LIFO
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Cost Index =
Sample of Ending Inventory at Current-Year Costs
Sample of Ending Inventory at Base-Year Costs
× 100
Double-Extension MethodDouble-Extension Method
Determination of Cost Index
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Cost Index =
Sample of Ending Inventory at Current -Year Costs
Sample of Ending Inventory at Previous-Year Costs
×
Link-Chain MethodLink-Chain Method
Previous-Year Cost
Index
Determination of Cost Index
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A company may use inventory pools in conjunction with dollar-value LIFO. The purpose of the pools is to maintain the benefits from using LIFO when fluctuations in the physical quantities
or similar inventory items occur and when technological change takes place.
Inventory Pools
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Life Valuation Adjustment - Frequently, a company uses LIFO for external financial reporting and income tax purposes but uses another method for internal management.
Additional LIFO Considerations
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Interim Statements Using LIFO – If a company uses LIFO for annual reporting purposes, it must use LIFO for interim reporting purposes. GAAP states that if a company using LIFO has an inventory liquidation at an interim date that it expects to replace by the end of the annual period, it does not include the LIFO liquidation in its inventory, and its cost of sales includes the expected cost of replacement of the liquidated LIFO inventory.
Additional LIFO Considerations
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Change to or from LIFO - A company may occasionally change its inventory cost flow assumption.
To – Usually, the effect on the results of prior periods is not determinable. Then GAAP requires that the company apply the change prospectively, as of the earliest date practicable.
From – Retroactively restate the results of prior periods and treat the change as a retrospective adjustment.
Additional LIFO Considerations
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IFRS vs. U.S. GAAP
IFRS do not allow the use of LIFO for both financial and tax purposes.
While both U.S. GAAP and IFRS allow the use of multiple acceptable cost flow assumptions, IFRS require that the same assumption be used for all inventories that have a similar nature and use. No such requirement exists under U.S. GAAP.
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1. An exchange gain occurs when the exchange rate declines between the date a payable is recorded as a result of a purchase of inventory and the date of the cash payment.
2. An exchange gain occurs when the exchange rate increases between the date a receivable is recorded as a result of a sale of inventory and the date of the cash receipt.
When exchange rates are stated in terms of $ per unit of foreign currency, exchange gains and losses occur for purchases or sales on account as follows:
When exchange rates are stated in terms of $ per unit of foreign currency, exchange gains and losses occur for purchases or sales on account as follows:
3. An exchange loss occurs when the exchange rate increases between the date a payable is recorded as a result of a purchase of inventory and the date of the cash payment.
4. An exchange loss occurs when the exchange rate declines between the date a receivable is recorded as a result of a sale of inventory and the date of the cash receipt.
RMBRMB
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Chapter 8
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