B describe different inventory valuation methods (cost formulas); Flashcards
describe different inventory valuation methods (cost formulas)
Total inventory costs will…
…vary over time
Specific Identification
Use: Inventory that is not easily interchangable (diamonds)
Cost of Sales + Cost of EI = actual costs incurred to purchase or manufacture the items specifically ID’ed as sold and specifically ID’ed as remaining inventory.
“this method matches the physical flow of the specific items sold and remaining in inventory to their actual cost.”
FIFO
Oldest Sold First, Newest Remain in Inventory
“cost of sales reflects the cost of goods in beginning inventory plus the cost of items purchased (or manufactured) earliest in the accounting period, and the value of ending inventory reflects the costs of goods purchased (or manufactured) more recently. In periods of rising prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold. Conversely, in periods of declining prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold.”
WAC
“Weighted average cost assigns the average cost of the goods available for sale (beginning inventory plus purchase, conversion, and other costs) during the accounting period to the units that are sold as well as to the units in ending inventory. In an accounting period, the weighted average cost per unit is calculated as the total cost of the units available for sale divided by the total number of units available for sale in the period (Total cost of goods available for sale/Total units available for sale).”
LIFO
“LIFO is permitted only under U.S. GAAP. This method assumes that the newest goods purchased (or manufactured) are sold first and the oldest goods purchased (or manufactured), including beginning inventory, remain in ending inventory. In other words, the last units included in inventory are assumed to be the first units sold from inventory. Therefore, cost of sales reflects the cost of goods purchased (or manufactured) more recently, and the value of ending inventory reflects the cost “of older goods. In periods of rising prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold. Conversely, in periods of declining prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold.”
LACEY INVENTORY COST METHODS
*LIFO is a legal way to make inventory lower and pay less tax
Lacey FIFO
Sell old first
LAcey LIFO
Sell newest items first, keep the oldest items hanging out:: Engage in this begavior when pricing are rising - What true about the older items if we keep them around? Well, they cost less thus leading to a lower EI, a higher COGS and paying less taxes
Lower EI value and pay less tax, when using LIFO
LIFO RESERVE LACEY
THE change in last years ending Inv. with new years beg. Inv
WAC metod
Use avg. cost of all items to sell
When does the choice of cost method have a ‘direct impact on financial statements and their comparability?’
“If the choice of method results in more cost being allocated to cost of sales and less cost being allocated to inventory than would be the case with other methods, the chosen method will cause, in the current year, reported gross profit, net income, and inventory carrying amount to be lower than if alternative methods had been used.”
General Cost Method Stuff
“A company must use the same inventory valuation method for all items that have a similar nature and use”
“When items are sold, the carrying amount of the inventory is recognised as an expense (cost of sales) according to the cost formula (cost flow assumption) in use.”
“Given changing price levels, however, the choice of inventory valuation method can have a significant impact on the amount of reported cost of sales and inventory. And the reported cost of sales and inventory balances affect other items, such as gross profit, net income, current assets, and total assets.”
Random Stuff - practice Calc. the assumptions
