300273 Flashcards
Nest Co. recorded the following inventory information during the month of January:
Unit Total Units
Units Cost Cost on Hand Balance on 01/01 2,000 $1 $2,000 2,000 Purchased on 01/08 1,200 3 3,600 3,200 Sold on 01/23 1,800 1,400 Purchased on 01/28 800 5 4,000 2,200 Nest uses the LIFO method to cost inventory. What amount should Nest report as inventory on January 31 under each of the following methods of recording inventory?
Perpetual: $2,600; Periodic: $5,400
Perpetual: $5,400; Periodic: $5,400
Perpetual: $2,600; Periodic: $2,600
Perpetual: $5,400; Periodic: $2,600
Perpetual: $5,400; Periodic: $2,600
Under the LIFO method, the last goods in are treated as the first ones included in cost of goods sold.
The perpetual method of LIFO treats units sold as coming from the last units acquired prior to that sale. Thus, the sale on January 23 leaves remaining inventory at 1,400 units at $1 (2,000 + 1,200 - 1,800). The purchase on January 28 adds $4,000 to the inventory for a total of $5,400.
When using the periodic method, the inventory is not valued until the end of the period. Under the periodic method, the ending inventory of 2,200 units is priced at the earlier prices during the year (2,000 at $1 plus 200 at $3) for a total of $2,600.
Dollar-Value LIFO
Dollar-value LIFO is a short-cut cost flow method that approximates the results of LIFO, which measures inventory layers in terms of dollars rather than physical units. Dollar-value LIFO requires the use of a price index and the concept of a base year (the year in which dollar-value LIFO is adopted).
Inventory
The aggregate of items of tangible personal property owned by the business (to which the firm has legal title) intended either for internal consumption in the production of goods for sale or for sale is considered inventory. The balance of costs applicable to goods on hand, including raw materials (for use in the production process), intermediate products and parts still in the production process (work-in-process), and finished goods is also considered inventory.
The major objective of accounting for inventories is to facilitate the determination of income. This is achieved through the proper valuation of inventories—the measurement of the value of the current assets and inventories, and the measurement of the related expense and cost of goods sold.
The basis of inventory accounting is cost. Inventories are valued at acquisition or production cost, which is generally held to be the sum of the purchase price plus indirect acquisition costs (freight, insurance, and handling) for purchased goods and the sum of direct materials, direct labor, and allocated factory overhead (i.e., the appropriate general and administrative costs that are clearly related to production) for manufactured goods. Selling, general, and administrative costs not directly related to production should be expensed rather than included in the valuation of inventory, which involves the use of judgment.
Standard costs may be used for inventory pricing so long as they are adjusted at reasonable intervals to reflect current conditions.
Valuation (pricing) of inventories involves:
- determination of physical quantity (number of units) and
- unit cost (in dollars).
Unit cost depends on the choice from among various alternative pricing (cost flow) assumptions:
- last-in, first-out (LIFO),
- first-in, first-out (FIFO),
- weighted average, and
- specific identification.
Consideration must also be given to the cost principle (i.e., the lower-of-cost-or-market rule (LCM)).
Inventories must be compiled periodically (physical count) and valued and compared to the amounts recorded in the accounts. Accounting records can be maintained under a periodic or perpetual system.
FASB ASC 330-10
Inventory Cost Flow Assumptions
Inventory cost flow assumptions are conceptual methods of applying costs to inventories, alternative pricing methods, conceptual matching of inventory costs to sales, and methods for allocation of costs to inventory and cost of goods sold. The cost (cost of goods sold) to be matched against revenue from a sale will usually not be the identified cost of the specific item that was sold (except with the specific identification cost flow assumption), especially in cases in which similar goods are purchased at different times and at different prices.
There are four assumptions that are acceptable under GAAP:
LIFO (last-in, first-out):
Unit cost LIFO
Dollar-value LIFO
FIFO (first-in, first-out)
Average cost:
Weighted average
Moving average
Specific identification
Cost flow assumptions are based on the cost principal with emphasis on the order in which the actual unit costs incurred are assigned to ending inventory and to cost of goods sold in conformity with the matching principle.
Last In, First Out (LIFO)
LIFO is a cost flow assumption that matches the latest (most recent) costs to current sales revenues. It is based on the assumption that the newest units with the most current acquisition costs are sold first and thus current costs are used to determine cost of goods sold. As a result, the units left in ending inventory are the oldest units. LIFO requires identification of inventory layers at different unit costs and can be used with either the periodic or perpetual inventory system, with slightly different results. It matches current costs against current revenue—as costs are rising, reported income will be lower than under FIFO or average cost. It recognizes the flow of costs versus the usual physical flow of units (cash outflow is recognized in the reverse order as cash inflows). The criticism of this method is that it produces an inventory value that is not at current cost.
If LIFO is used for income tax purposes, it must also be used for reporting purposes. A change from LIFO to any other cost flow method is considered a special change in accounting principle that is given retroactive treatment.
Periodic Inventory System
The periodic inventory system is a method of measuring the physical quantities in inventory under which the units (and costs) are determined at the end of the accounting period based on a physical count.
Items are:
- counted, weighed, or otherwise measured and
- multiplied by the unit cost (depending on the cost flow assumption utilized) to value the inventory.
Cost of goods sold is the residual amount and cannot be independently verified. - Cost of goods sold = Beginning inventory + Purchases - Ending inventory
The units in inventory at any point in time during the accounting period are not exactly known—the beginning balance does not change until the end of the period.
The periodic inventory system is analogous to a “batch” processing system. (Contrast to perpetual inventory.)
Perpetual Inventory
The perpetual inventory system is a method of measuring the physical quantities in inventory under which the units received (manufactured) and issued (sold) are recorded continuously during the accounting period. Costs may also be determined continuously or determined only at the period-end. The current, up-to-the-minute quantity on hand is known at all times. (Contrast to periodic inventory system.) Perpetual inventory is analogous to an online, real-time processing system. Physical count is not necessary except as a check on the accounting system. (This check is usually achieved by cycle counts, which are periodic counts of selected items.) Any difference found is charged to an inventory overage/shortage account.
The perpetual inventory system is the preferred method of measuring the physical quantities and has become more feasible to apply in more industries as data processing costs have declined. It provides for critical control and safekeeping of inventory and for accurate inventory management.
Physical Inventory
Physical inventory is the physical count of inventory taken by the client at year-end (i.e., on the last day of the fiscal year) to obtain evidence regarding existence and completeness. The auditor observes this procedure and makes selected test counts. The observation of inventories is one of the required audit procedures. (AU-C 501.12(a))
Based on the auditor’s evaluation of internal controls over inventory, the physical count may be taken prior to year-end. If the auditor does not observe the client’s physical count, he must either apply other audit procedures to assure himself of the inventory quantities or disclaim an opinion. (AU-C 501.14)
2231.01
Several cost flow assumptions are used for purposes of determining inventory cost. Among the most commonly used methods are the following:
a. First-in, first-out (FIFO)
b. Last-in, first-out (LIFO)
c. Average
d. Specific identification
2231.03
Periodic inventory system
a. FIFO
June 30 inventory:
300 units at $12 $ 3,600
100 units at $14 1,400
$ 5,000
=======
Cost of goods sold:
Cost of goods available for sale $11,400
Less June 30 inventory 5,000
$ 6,400
=======
b. LIFO
June 30 inventory:
200 units at $10 $ 2,000
200 units at $11 2,200
$ 4,200
=======
Cost of goods sold:
Cost of goods available for sale $11,400
Less June 30 inventory 4,200
$ 7,200
=======
c. Average (weighted-average)
Computation of average cost per unit:
Total cost of goods available for sale $11,400
divided by total units for sale 1,000
= average cost per unit $ 11.40
=======
June 30 inventory:
400 units at $11.40 $ 4,560
=======
Cost of goods sold:
Cost of goods available for sale $11,400
Less June 30 inventory 4,560
$ 6,840
=======
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average (moving-average)
FASB ASC 330-10-30-11
