Inventories Flashcards
Inventory costs that can be capitalized
ie Inventories on B.S
Cost of purchase (price, import tax, transport and handling)
Cost of conversion (labor, material, overheads, raw mat to finished goods)
Transportation to showroom/final location
Inventory costs that are expensed
ie COGS on I.S Abnormal waste Storage of final/finished goods Admin overhead Selling costs Shipping to customers
Inventory Valuation Methods
Specific Identification
FIFO
Weighted Average Cost
LIFO
Weighted Average Cost formula
= Total cost of units available for sale / total units available for sale
LIFO
- newest items purchased/manuf are sold first
- oldest goods remain in ending inventory
- COGS reflects COGS of purchaed/manuf recently
- value of inventory reflects cost of older goods
- not allowed under IFRS
LIFO during inflation v FIFO
LIFO will have higher COGS and lower NI
COGS formula
= beginning inventory + purchases - ending inventory
Ending inventory formula
= beginning inventory + purchases - COGS
Periodic and perpetual systems COGS and ending inventory will be the same for
Specific identification and FICO
Periodic and perpetual systems COGS and ending inventory will be different for
LIFO and WAC
LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)
COGS
LIFO: higher
FIFO: lower
LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)
Taxes
LIFO: lower
FIFO: higher
LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)
EBT
LIFO: lower
FIFO: higher
LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)
NI
LIFO: lower
FIFO: higher
LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)
Ending Inventory
LIFO: lower
FIFO: higher
LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)
Working capital
LIFO: lower
FIFO: higher
LIFO v FIFO with rising prices and stable inventory levels. (which is higher or lower)
Cash flow (after tax)
LIFO: higher
FIFO: lower
US GAAP firms prefer LIFO because
taxes paid are lower
When prices are increasing, LIFO results in:
higher COGS lower profit lower net income tax lower net income higher after tax cash flow
LIFO Reserve
-definition
The LIFO reserve is the difference between the reported LIFO inventory carrying amount and the inventory amount that would have been reported if FIFO would have been used.
LIFO Reserve
-equation
LIFO Reserve = FIFO inventory value - LIFO inventory value
*LIFO reserve amount must be disclosed
FIFO Inventory value =
Formulas for adjusting inventory
FIFO Inventory = LIFO inventory value + LIFO reserve
FIFO COGS =
Formulas for adjusting inventory
“What amount would ABC’s COGS have been if it had used FIFO instead of LIFO?”
LIFO COGS - (ending LIFO reserve - beginning LIFO reserve)
FIFO NI =
Formulas for adjusting inventory
“What net income would ABC report for yr x if it had used the FIFO method instead of LIFO method”
FIFO NI = LIFO NI + changes in LIFO reserve (1-t)
