Kế toán doanh nghiệp - Chapter 7: Reporting and interpreting cost of goods sold and inventory

Chapter 7Reporting and interpreting cost of goods sold and inventoryMcGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.Understanding the BusinessProvide sufficient quantities of high-quality inventory.Minimize the costs of carrying inventory.Primary Goals of Inventory ManagementItems Included in InventoryRaw MaterialsWork in ProcessFinished GoodsMerchandise InventoryMerchandisersManufacturingCosts Included in Inventory PurchasesThe cost principle requires that inventory be recorded at the price paid or the consideration given.Invoice PriceFreight-InInspection CostsPreparation CostsAny purchase returns and allowances and purchase discounts taken are subtracted.Flow of Inventory CostsCost of Goods Sold equationBeginningInventoryPurchasesfor the PeriodEnding Inventory(Balance Sheet)Goods Availablefor SaleCost of Goods Sold(Income Statement)Beginning inventory + Purchases = Goods Available for SaleGoods Available for Sale – Ending inventory = Cost of goods sold(Inventory remaining)(Inventory sold)Perpetual and periodic inventory systemsPerpetualPurchase transactions are recorded directly in an inventory account.Sales require two entries to record: (1) the retail sale and (2) the cost of goods sold. PeriodicNo up-to-date record of inventory is maintained during the year.Sales require one entry to record the retail sale. Cost of goods sold is calculated. Inventory Costing MethodsTotal Dollar Amount of Goods Available for SaleEnding InventoryInventory Costing MethodCost of Goods SoldInventory Costing MethodsSpecific IdentificationFirst-in, First-out (FIFO)Last-in, First-out (LIFO)Weighted AverageSpecific IdentificationWhen units are sold, the specific cost of the unit sold is added to cost of goods sold.Cost Flow AssumptionsThe choice of an inventory costing method is not based on the physical flow of goods on and off the shelves.LIFOFIFOWeightedAverageFirst-In, First-Out MethodCost of Goods SoldOldest CostsEnding InventoryRecent CostsLast-In, First-Out methodEnding InventoryCost of Goods SoldOldest CostsRecent CostsAverage Cost MethodWhen a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Available for SaleNumber of Units Available for Sale÷Perpetual inventory systems and cost flow assumptions in practiceFIFO inventory and cost of goods sold are the same whether computed on a perpetual or periodic basis.Accounting systems that keep track of the costs of individual items normally do so on a FIFO or average cost basis.As a consequence, companies that wish to report under LIFO convert the outputs of their perpetual inventory system to LIFO with an adjusting entry at the end of each period. Financial statement effects of inventory costing methodsInternational PerspectiveLIFO and International ComparisonsWhile U.S. GAAP allows companies to choose between FIFO, LIFO, and weighted average inventory methods, International Financial Reporting Standards (IFRS) currently prohibit the use of LIFO.These differences can create comparability problems when one attempts to compare companies across international borders.IFRS requires that the same method be used for all inventory items that have a similar nature and use. GAAP allows different inventory accounting methods to be used for different types of inventory items. Financial Statement Effects of inventory Costing MethodsAdvantages of MethodsBetter matches current costs in cost of goods sold with revenues.Ending inventory approximates current replacement cost.First-In, First-OutLast-In, First-OutSmoothes out effects of price changes.Weighted AverageManagers Choice of Inventory MethodsNet Income EffectsManagers prefer to report higher earnings for their companies.Income Tax EffectsManagers prefer to pay the least amount of taxes allowed by law as late as possible.LIFO Conformity RuleIf last-in, first-out is used to compute taxable income, it must also be used to calculate inventory and cost of goods sold for financial statements.Valuation at Lower of Cost or MarketEnding inventory is reported at the lower of cost or market (LCM). Replacement CostThe current purchase price for identical goods.The company will recognize a “holding” loss in the current period rather than the period in which the item is sold.This practice is conservative.Internal Control of InventorySeparation of inventory accounting and physical handling of inventory.Storage in a manner that protects from theft and damage.Limiting access to authorized employees.Maintaining perpetual inventory records.Comparing perpetual records to periodic physical counts.Errors in Measuring Ending InventoryInventory and Cash FlowsAddSubtractCash Flows from OperationsNet IncomeDecrease in InventoryIncrease in Accounts PayableIncrease in Inventory Decrease in Accounts PayableEnd of Chapter 7