...Reporting and Interpreting Cost of Goods Sold and Inventory ANSWERS TO QUESTIONS 1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it represents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important. On the income statement, inventory exerts a direct impact on the amount of income. Therefore, statement users are interested particularly in the amount of this effect and the way in which inventory is measured. Because of its impact on both the balance sheet and the income statement, it is of particular interest to all statement users. 2. Fundamentally, inventory should include those items, and only those items, legally owned by the business. That is, inventory should include all goods that the company owns, regardless of their particular location at the time. 3. The cost principle governs the measurement of the ending inventory amount. The ending inventory is determined in units and the cost of each unit is applied to that number. Under the cost principle, the unit cost is the sum of all costs incurred in obtaining one unit of the inventory item in its present state. 4. Goods available for sale is the sum of the beginning inventory and the amount of goods purchased during the period...
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...value of the goods in inventory. By reporting and analyzing such information, a company can help to predict financial performance and the best plan to achieve results. Such inventory valuation methods include: Average Cost Method; FIFO; and LIFO. The inventory valuation methods use two different inventory systems – perpetual and periodic. The perpetual inventory system is used when a company reports the cost of goods sold as those goods are sold throughout the accounting period. The periodic inventory system is used when a company reports the cost of goods sold as a residual at the end of the accounting period. Average Cost Average Cost method is defined as “an inventory plan that prices items in the inventory on the basis of the average cost of all similar goods available during the accounting period.” The benefits of Average Cost include: · Simple to calculate and analyze results · Not subject to income manipulation · Useful when dealing with similar inventory items Average Cost method will result in the gross profit and net income in the middle of the FIFO method and LIFO method results. In cases where the Average Cost method is used, the inventory valuation and cost of goods sold will be have different results if the perpetual or periodic inventory system is used. The “Inventory Template” computed the value of the Periodic Average Cost. The value of the inventory using the Periodic Average Cost method is $48,645.29. The Ending Inventory Purchases Cost Total...
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...efficient than Westwood’s might be their different method to account for inventory. Over 2006, Morgan Manufacturing implemented significant productivity improvements over Westwood. But these improvements were not reflected in the financial statements (Exhibit 1). Morgan Manufacturing used LIFO as its inventory costing method, while Westwood used FIFO. Additionally, comparison of three key ratios indicated relative differences between these two competitors: gross margin percentage, pre-tax return on sales, and pre-tax return on assets. And calculations of these three ratios are below: Ratio | Calculation | Gross margin percentage | Gross margin/ Sales | Pre-tax return on sales | Income before tax/Sales | Pre-tax return on assets | Income before tax/ Total assets | Based on the two different methods they used to account for inventory, here is the 2006 comparison of the three ratios between Morgan Manufacturing and Westwood: Ratio | Morgan Manufacturing | Westwood, Inc. | Difference | Gross margin percentage | 44.5% | 45% | -0.5% | Pre-tax return on sales | 14.5% | 15% | -0.5% | Pre-tax return on assets | 13.4% | 13.4% | 0 | Since Westwood uses FIFO as its inventory accounting method, conversion of Morgan Manufacturing’s accounts from LIFO to FIFO makes some adjustment so that the comparison could be done on a comparable basis. According to the relationship between Inventory, purchase and COGs, also the definition of LIFO reserve, we can get the...
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...Cost Basis Assumed Data Beginning Inventory: TV Set 1 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases: TV Set 2 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TV Set 3 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Goods Available for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales: One TV set . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost Flow Assumption FIFO Financial Statements Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . Gross Margin on Sales . . . . . . . . . . . . . . . . . . . . . . . Ending Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . aTV $250 290 300 $840 $550 Weighted Average (2) $550 280b $270 $560e LIFO (3) $550 300c $250 $540f (1) $550 250a $300 $590d set 1 costs $250. TV sets costs $280 ( cTV set 3 costs $300. bAverage dTV $840/3). sets 2 and 3 cost $290 $300 $590. average TV sets cost 2 $280 $560. fTV sets 1 and 2 cost $250 $290 $540. eTwo LAST-IN, FIRST-OUT The last-in, first out (LIFO) cost flow assumption assigns the costs of the latest units acquired to the withdrawals and assigns the costs of the oldest units to the ending inventory. Some theorists argue that LIFO matches...
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...FIFO and LIFO Accounting Implications of Valuing Inventory under FIFO and LIFO Laura Lance Financial Accounting, ACC211 Instructor Suzanne Lozano 8 December 2011 FIFO and LIFO 1 Accounting Implications of Valuing Inventory under FIFO and LIFO LIFO and FIFO Inventory Accounting Methods The two most common methods of inventory accounting are Last-in-first-out (LIFO), and first-in –first out (FIFO), choosing the correct method of inventory accounting could be detrimental to the income statement and the statement of cash flow, and also it would affect the balance sheet of the company. For a company, it is imperative that they track their inventories and cost of goods sold. Both of these methods of accounting are a way they could do this. LIFO and FIFO are methods used for accounting for the inventory. I will discuss these two different methods. FIFO FIFO is a method that companies use whose inventories are like food or an item that could turn bad if not sold quickly. A company using FIFO normally looks better to investors then they are. It is sort of a false advertisement of higher profit then it should be reflecting. The good part of a FIFO method is that it reflects new purchases and with that would show accurate replacement costs. LIFO LIFO is a method that companies would use if their inventories were not perishable or had a wear out date. If and when cost of the items rise, the higher...
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...2012 Session 3 Kansas City Zephyrs and Inventories Jacob Cohen MIT Sloan School of Management 1 Kansas City Zephyrs – Setting I Kansas City Zephyrs – Setting II What are the owners’ incentives? What are the players’ incentives? Kansas City Zephyrs – Discussion Take-Away slide I Kansas City Zephyrs • A case where financial statements are used to resolve an internal dispute • Distinct from Shrek 2, which focused on the effect of accounting choices on external stakeholders (in particular, shareholders). Take-Away slide II The role of incentives • Whether the cup is half-full or half-empty depends on the incentives. • “No one ever said accounting is an exact science” The role of judgment • Timing decisions that affect revenue/expense recognition • Which decision you take depends on the objective Public vs. private accounting • When reporting to the public, a firm must follow GAAP. • In resolving internal disputes this may not always be true. Inventory 7 Overview In today’s class we will cover inventories: • Understanding the Inventory Equation • LIFO and FIFO cost-flow assumptions • LIFO tax conformity rule • Inventory accounting: IFRS vs. GAAP • Disclosures regarding cost flow assumptions 8 Two Main Issues Inventory accounting has two fundamental components: 1) Product Costing Decision: What costs are included in each product's inventory account? (Product costing is discussed...
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... LIFO or FIFO Submission Date Sep-9-2015 Class: Accounting Submitted by Objective: Three companies changed their inventory accounting policy. Find the reason behind the change and analyze the impact of the change on the Balance Sheet and Profit & Loss. What accounting lessons we can learn from these two cases? Case 1 Questions 1. Use a table to show general effects of FIFO vs. LIFO Answer: Difference between FIFO and LIFO Market price rise | FIFO | LIFO | VS | Ending inventory | ↑ | ↓ | FIFO > LIFO | Total assets | ↑ | ↓ | FIFO > LIFO | COGS | ↓ | ↑ | FIFO < LIFO | Income tax | ↑ | ↓ | FIFO > LIFO | Net income | ↑ | ↓ | FIFO > LIFO | Current ratio | ↑ | ↓ | FIFO > LIFO | Return on investment | ↑ | ↓ | FIFO > LIFO | 2. (a)What factors should the management of Example Corporation in this case consider when deciding whether to switch from LIFO to FIFO at the beginning of Year 2? (b) Would this change impact the balance sheet or income statement in a material way? Why or why not? Answer: (a) When the company considers whether to switch its inventory method, the impact on the Balance Sheet and P&L for each method needs to be considered. FIFO will allow report of a larger ending inventory and greater net income, but the company will pay more income taxes. Continuing to use LIFO will lead to lower net income but lower taxes. FIFO will also...
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... LIFO or FIFO Submission Date Sep-9-2015 Class: Accounting Submitted by Objective: Three companies changed their inventory accounting policy. Find the reason behind the change and analyze the impact of the change on the Balance Sheet and Profit & Loss. What accounting lessons we can learn from these two cases? Case 1 Questions 1. Use a table to show general effects of FIFO vs. LIFO Answer: Difference between FIFO and LIFO Market price rise | FIFO | LIFO | VS | Ending inventory | ↑ | ↓ | FIFO > LIFO | Total assets | ↑ | ↓ | FIFO > LIFO | COGS | ↓ | ↑ | FIFO < LIFO | Income tax | ↑ | ↓ | FIFO > LIFO | Net income | ↑ | ↓ | FIFO > LIFO | Current ratio | ↑ | ↓ | FIFO > LIFO | Return on investment | ↑ | ↓ | FIFO > LIFO | 2. (a)What factors should the management of Example Corporation in this case consider when deciding whether to switch from LIFO to FIFO at the beginning of Year 2? (b) Would this change impact the balance sheet or income statement in a material way? Why or why not? Answer: (a) When the company considers whether to switch its inventory method, the impact on the Balance Sheet and P&L for each method needs to be considered. FIFO will allow report of a larger ending inventory and greater net income, but the company will pay more income taxes. Continuing to use LIFO will lead to lower net income but lower taxes. FIFO will also...
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...Process Costing: The First-In, First-Out Method 1 FIFO Method of Process Costing In this supplement to Managerial Accounting we will illustrate the first-in, first-out (FIFO) method of process costing using the data for MVP Sports Equipment Company, which was given in Exhibit 4–4 in Chapter 4 of the text. Unlike the weighted-average method, the FIFO method does not commingle costs from two or more accounting periods. As the illustration will show, the costs from each period are treated separately. Step 1: Analysis of Physical Flow of Units The physical flow of units is unaffected by the process-costing method used. Therefore, step 1 is identical under the weighted-average and FIFO methods. See Exhibit 4–5 in the text. Step 2: Calculation of Equivalent Units A table of equivalent units, under FIFO process costing, is presented in Exhibit 4–A.* It is identical to the table prepared under the weighted-average method except for one important difference. Under the FIFO method, the equivalent units of direct material and conversion represented by the March 1 work-in-process inventory are subtracted in the last row of the table. By subtracting the equivalent units in the beginning work in process, we are able to determine the new equivalent units of activity accomplished in March only. The 20,000 physical units in the March 1 work in process have all of their materials, so they represent 20,000 equivalent units of direct material. However, these units are only 10 percent...
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...CHAPTER 6 Reporting and Analyzing Inventory Study Objectives 1. Describe the steps in determining inventory quantities. 2. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. 3. Explain the financial statement and tax effects of each of the inventory cost flow assumptions. 4. Explain the lower of cost or market basis of accounting for inventories. 5. Compute and interpret the inventory turnover ratio. 6. Describe the LIFO reserve and explain its importance for comparing results of different companies. Summary of Questions by Study Objectives and Bloom’s Taxonomy Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT Questions 1. 1 C 6. 2 AP 11. 2 K 16. 4 AP 21. 6 C 2. 1 K 7. 2 C 12. 3 C 17. 4 K 22. 7 C 3. 1 K 8. 2 C 13. 3 C 18. 2 K 23. 7 C 4. 1 C 9. 2 K 14. 3 C 19. 3 C 24. 8 AN 5. 1 C 10. 2 C 15. 4 C 20. 5 AN Brief Exercises 1. 1 C 3. 2 AP 5. 3 AP 7. 5 AP 9. 7 AP 2. 2 AP 4. 3 C 6. 4 AP 8. 6 C 10. 8 AN Exercises 1. 1 AN 4. 2 AN 7. 2, 3 AP 10. 5, 6 AP 13. 8 AN 2. 1 AN 5. 2 AP 8. 5 ...
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...Debits, Credits, and Inventory Costs Part 1: Double-Accounting Method of Recording When using the double-accounting system, also known as the double-entry method, each transaction on the General Journal and associated account activity catalog must be recorded at least into two accounts. The debit account, often on the left, is denoted by ‘Dr’ while the credit account, often on the right side, is denoted by ‘Cr’. The entries are made depending on the account type, which may be an asset, a liability, an expense account etcetera, or depending on whether the transaction increases the account or decreases it (Lee, 1977). For instance, any transaction noted on the debit side would add to the assets account. Alternatively, a transaction would be entered on the debit side if it lowers the liabilities or the equity. On the other hand, all transactions that lower the assets account would be posted on the credit side. Any transaction that adds to the liabilities or the equity would similarly be entered on the credit side of the General Journal. Debits and credits have effects on particular accounts. A debit entry can increase either an asset account or an expense account, or decrease equity account or a liability account. A credit entry, on the other hand, either increases the liability account or the equity account, or conversely decreases the asset account or the expense account. Therefore, when assets rise, they are recorded in the debit account. However...
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... On May 13th, 2015 FASB issued Accounting Standards Update, Simplifying the Measurement of Inventory. The Board came to the decision of abandoning inventory measured using the LIFO method, which is using last-in, first-out. They also decided on excluding the retail inventory methods. The Board also requires inventory to be measured at net realizable value and at the lower of cost. They believe that the result will cause a reporting entity to not be required to consider replacement costs. There will not be additional disclosures required in the periods after the amendments. The amendments will be applied in the annual reporting periods after December 15th, 2016 with interim reporting periods starting after December 15th, 2017. If LIFO is used for tax purposes, it must also be used for financial reporting of a company. This can cause trouble for certain companies. When prices rise, companies using LIFO minimize their tax liability, but the companies minimize their net income as well, in turn causing failure of the companies to meet the minimum level of profitability under a loan or meet what analysts have forecasted for the company. LIFO is also not used in a good portion of foreign jurisdictions. This limits the ability to expand abroad for companies valuing inventory using LIFO. If a company chose to expand internationally, they would have to keep two sets of inventory records; one for US tax law and domestic financial reporting and one for international reporting...
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...way. II II Acknowledgement Acknowledgement In the beginning, we thank Allah for giving us the strength and health to let this work see the light and our parents for their help and support. Our Prophet Mohammed said: “Who doesn’t thank people he doesn’t thank Allah”. We want to thank everyone help and participated in making this study starting from our honorable: Mr. Salah Shubair. Who put a lot of faith in our capabilities and encouraged us to complete this study. We thank all of our teachers in the faculty of commerce and our colleagues and friends for their support . III Abstract Abstract The study aims to discuss and evaluate one of the accounting problems, which is choosing proper method for inventory evaluation, that play an important role in the evaluation of businesses financial position and net income. There are many factors affecting the business decision while choosing any of these methods which...
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...Timothy Towfeless Acct 301A Paper Prof. Jose Miranda Lopez FIFO Cost Flow for Buffalo Wild Wings (BWLD) Inventory Throughout the course of this class, many topics have been brought to the table. In every accounting class, they will reiterate the conceptual framework of accounting by briefly discuss about the Income Statement, Balance Sheet and Cash Flow Statement. Each accounting class they will go in depth of those conceptual frameworks, but in the perspective from the side of Assets or Liability or Stockholder’s equity. Majority of the course was spent on the asset side, topics such as Cash, Receivables, and Inventory Valuations, also with additional issues, were discussed. When choosing a restaurant for a topic, the first thing that comes to mind is inventory. How can a restaurant operate without taking into account inventory? Buffalo Wild Wing is a very unique restaurant that operates on providing wings and sports bar ambiance. In order to understand how they control inventory, there needs to be a specific identification. Specific Identification calls for identifying each item sold and each item in inventory; is used by companies that focus on selling inventories that will not be substantial and can be counted physically without incurring heavy costs for tracking individual inventory items. This is a good idea for Buffalo Wild Wings because they can keep track of the food inventory, but the disadvantages to this method involve income manipulation on similar or identical...
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...Workshop Three: Case Studies Case 6-2: A + B + C) FIFO, LIFO, AND AVERAGE COST METHODS FOR 2005, 2006, 2007: FIFO 2005 COGS 1840 X $20 total= $36,800 600 X $20.25 $12,150 380 X $21 $7,980 2820 X $56,930 2005 inventory 420 X 21 total= $8,820 400 X 21.25 $8,500 200 X 21.5 $4,300 1020 $21,620 LIFO 2005 COGS 200 X 21.5 TOTAL= $4,300 400 X 21.25 $8,500 800 X 21 $16,800 600 X 20.25 $12,150 820 X 20 $16,400 2820 $58,150 2005 INVENTORY 1020 X 20 TOTAL= $20,400 AVERAGE COST 2005 COGS 2820 X 20.456 TOTAL= $57,686 INVENTORY 1020 X 20.456 TOTAL= $20,865 FIFO 2006 COGS 420 X 21 TOTAL= 8820 400 X 21.25 8500 200 X 21.5 4300 700 X 21.5 15050 700 X 21.5 15050 660 X 22 14520 3080 66240 2006 INVENTORY 40 X 22 TOTAL= 880 1000 X 22.25 22250 1040 23130 LIFO 2006 COGS 1000 X 22.25 TOTAL= 22250 700 X 22 15400 700 X 21.5 15050 680 X 21.5 14620 3080 67320 2006 INVENTORY 20 X 21.5 430 1020 X 20 20400 1040 X 20 20830 AVERAGE COST 2006 COGS 3080 X 21.509 66248 INVENTORY 1040 X 21.509 22369 FIFO 2007 COGS 40 X 22 TOTAL= 880 1000 X 22.25 22250 1000 X 22.5 22500 700 X 22.75 15925 210 X 23 4830 2950 66385 2007 INVENTORY 490 X 23 TOTAL= 11270 700 X 23.5 16450 ...
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