Chapitre 7 Flashcards
All cost Included in Inventory
1)Costs of purchase, e.g.
purchase price, net of discounts
import duties and taxes
transport and handling
insurance during transport
2)Costs of conversion
3)Other costs incurred in bringing the inventories to their present location and condition
What is the costs of purchase?
purchase price, import and tax-related duties, transport, insurance during transport, handling, and other costs directly attributable to the acquisition of finished goods, materials, and services. Trade discounts, rebates, and similar items reduce the price paid and the costs of purchase.
What is the cost of conversion?
costs directly related to the units produced, such as direct labor, and fixed and variable overhead costs.
Cost excluded from inventory
1) Abnormal costs incurred as a result of waste of materials, labor or other production conversion inputs
2)Storage costs (unless required as part of the production process)
3)All administrative overhead and selling costs
Specific Identification:
cost of sales and cost of ending inventory reflect the actual costs incurred to purchase (or manufacture) the items specifically identified as sold and those specifically identified as remaining in inventory.
First-In, First-Out (FIFO):
assumes that the earliest goods purchased (or manufactured) are sold first and the most recent goods purchased (or manufactured) remain in ending inventory.
Last-In, First-Out (LIFO):
assumes that the most recent 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. LIFO is not permitted under IFRS.
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).
Periodic inventory system
1) inventory values and costs of sales are determined at the end of an accounting period.
2) The total of purchases and beginning inventory is the amount of goods available for sale during the period.
3)The ending inventory amount is subtracted from the goods available for sale to arrive at the cost of sales. The quantity of goods in ending inventory is usually obtained or verified through a physical count of the units in inventory.
LIFO will change under Periodic vs Perpetual
Perpetual inventory system:
inventory values and cost of sales are continuously updated to reflect purchases and sales.
In an environment of rising inventory unit costs and constant or increasing inventory quantities: FIFO compared to LIFO
Under FIFO, the earlier lower costs will be in cost of goods sold (COGS) and the later, higher costs will be in inventory.a lower amount to cost of sales on the income statement. Accordingly, because cost of sales will be lower under FIFO, a company’s gross profit, operating profit, and income before taxes will be higher.
a higher amount to ending inventory on the balance sheet. Accordingly, a company would show a higher current ratio, all else equal.
LIFO Reserve Definition? where is it not accepted?
the difference between the reported LIFO inventory carrying amount and the inventory amount that would have been reported if the FIFO method had been used (the FIFO inventory value less the LIFO inventory value).
not permitted by IFRS
How to adjust gross profit from LIFO to FIFO
incorporating the adjustment in Cost of Goods Sold (COGS), on an after-tax basis.
Effect on Balance sheet if you want to show from LIFO to FIFO
The increase to equity represents the cumulative increase in profit due to the decrease in cost of goods sold (LIFO reserve of $2,009 million) less the assumed taxes on that profit ($560 million).
Adjusting liabilities from LIFO to FIFO requires adjusting liabilities to show a tax liability for the amount of accumulated tax savings over the years.
Just understand and see slide 27 if you don’t
What is LIFO Layers and LIFO liquidation
When the number of inventory units manufactured or purchased exceeds the number of units sold, the LIFO reserve may increase as the result of the addition of new LIFO layers (the quantity of inventory units is increasing and each increase in quantity creates a new LIFO layer).
