Lecture 13 Flashcards
LCM requirement
lower of cost or market requirement
if the current replacement cost of the inventory is LESS than its historical cost, then the firm must adjust the carrying value of the inventory from historical cost to the lower market value
“market” = replacement cost
journal entry for adjusting carrying value of inventory from 40K to 35K
loss on inventory revaluation 5000
inventory 5000
what do we do when market values rise?
CAN NOT adjust the carrying value of the inventory upward
conservatism!
manufacturing firms have 3 categories of inventory
- raw materials
- work in process
- finished goods
expenditures & other charges directly incurred in bringing inventory to its sellable condition/location
costs capitalized as a cost of work in process inventory
raw material expense
direct labor expense
depreciation of manufacturing-related equipments
utilities expense related to manufacturing
when are costs transferred from work-in-process inventory to finished goods?
as production is completed and the goods become available for sale
when are costs expensed as part of COGS?
ONLY when goods are sold and delivered to the customer
gross profit =
sales - COGS
gross profit % =
gross profit/sales
inventory turnover =
COGS/avg. inventory
Days in inventory
365/inv. turnover
when prices are increasing…(LIFO & FIFO, inventory & COGS)
FIFO has highest ending inventory, lowest COGS, highest gross profit
LIFO has lowest ending inventory, highest COGS, lowest gross profit
when prices are decreasing…(LIFO & FIFO, inventory & COGS)
FIFO has lowest ending inventory, highest COGS, lowest gross profit
LIFO has highest ending inventory, lowest COGS, highest gross profit
FIFO: ___ is most “correct”
balance sheet
LIFO: ___ is most “correct”
income statement
