Lecture 2: Inventory costing system Flashcards
What is inventory
(Current asset, balance sheet) -> Cost of goods sold (cost, income statement)
Types of inventory
Manufacturers -> raw materials, work-in-progress, finished goods
Wholesalers/retailers/distributors -> finished goods
Service providers -> intangibles
Periodic
Over the total period. The cost of sales is not determined for each sales transaction individually but collectively for a whole period
Perpetual
Individual, for each transaction. The business should be able to establish the value and composition of the inventory
FIFO
First in, first out. Products purchased, are sold first
LIFO
last in, first out. Use the most recent purchases prices in the cost of sales calculation. Older purchases are assumed to remain in inventory. With LIFO a perpetual system can be trouble because many different purchases prices can be part of the inventory
AVCO
average cost assumption. Before determing the cost of sales of each transaction, the average purchase price at the moment of sale should be calculated
Inventory valuation comparison. When purchase prices go up
FIFO > LIFO
Inventory valuation comparison. When purchase price goes down
FIFO < LIFO
Profit comparison when purchase price goes up
FIFO > LIFO
Profit comparison when purchase price goes down
FIFO < LIFO
Expenses
the monetary value of the production means that were used during a period
Inventory costing systems and financial statements
Balance sheet: inventory (current asset)
Income statement: Cost of goods sold, gross profit
Cash flow statement: no impact on cash outflow in purchasing
FIFO versus LIFO
FIFO reflects replacement cost more accurately, in times of inflation higher profit and inventory valuation, allowed under both GAAP and IFRS
LIFO not a good indicator of ending inventory value, in times of inflation lower profit and inventory valuation, not allowed under IFRS, allowed under GAAP
Current cost convention
By keeping track of all price changes
