chapter 7 slides Flashcards
Costs included in Inventories and
recognized as expenses when goods are
sold:
Costs of purchase, e.g.
* purchase price, net of
discounts
* import duties and taxes
* transport and handling
* insurance during transport
* Costs of conversion
* Other costs incurred in bringing
the inventories to their present
location and condition
Costs excluded from Inventories and
recognized as expenses in period
incurred:
Abnormal costs incurred as a result
of waste of materials, labor or other
production conversion inputs
* Storage costs (unless required as
part of the production process)
* All administrative overhead and
selling costs
Lifo is permitted under IFRS
no
Specific Identification
Actual costs of items specifically identified as sold
allocated to COGS
Periodic inventory system
inventory values and costs of sales are determined at the end of an
accounting period.
* Purchases are recorded in a purchases account.
* The total of purchases and beginning inventory is the amount of goods available for sale during
the period.
* 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.
Perpetual inventory system
inventory values and cost of sales are continuously updated to reflect
purchases and sales
LIFO reserve
is the difference between inventory amount as
reported using LIFO and the inventory amount that would have
been reported using FIFO.
FIFO inventory value - LIFO inventory value = LIFO reserve.
* Companies using the LIFO method must disclose the amount of
the LIFO reserve.
* An analyst can use the disclosure to adjust a company’s
reported cost of goods sold and ending inventory from LIFO to
FIFO.
When the number of inventory units manufactured or purchased in a
period exceeds the number of units sold, the LIFO reserve may increase
with each increase in quantity creating a new LIFO “layer.”
When the number of units sold in a period exceeds the number of units
purchased or manufactured, the costs from older LIFO layers will flow to
COGS (some of the older units held in inventory are assumed to have been
sold), called “LIFO liquidation.”
how inventory is measured
Is measured and carried on the balance sheet at the lower of cost
of market.
Inventory under IFRS
Lower of cost or net realizable value
* Subsequent reversals allowed
Inventory GAAP
Lower of cost or market, defined as current replacement cost
subject to upper and lower limits
* Upper limit of market: net realizable value
* Lower limit of market: net realizable value less a normal profit
margin
* Subsequent reversals prohibited
