Vol. 3 Inventory Valuation Methods Flashcards
Contrast costs included in inventories and costs recognized as expenses in the period in which they are incurred. Describe different inventory valuation methods. Calculate and compare cost of sales, gross profit. Explain LIFO reserve and LIFO liquidation.
(Under IFRS)
Costs included in inventories
“all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition”
(Source)
Costs included in inventories
International Accounting Standard (IAS) 2
The costs of purchase (components)
the 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.
(items that reduce) the costs of purchase
trade discounts and rebates
(IFRS and US GAAP) exclude the following costs from inventory
abnormal costs incurred as a result of waste of materials,
labour or other production conversion inputs,
any storage costs,
and all administrative overhead and selling costs
Inventory valuation methods are referred to as ______ under IFRS and _________ under US GAAP
cost formulas (IFRS); cost flow assumptions (US GAAP)
If the choice of inventory method results in more cost being allocated to cost of sales and less cost being allocated to inventory, this will cause, in the current year, ______, __________, and ____________ to be lower
reported gross profit, net income, inventory carrying amount
A company must use the same inventory valuation method for …..
… all items that have a similar nature and use.
When items are sold, the carrying amount of the inventory is recognized as _________ (__________) according to the ___________ (_____________) in use.
an expense (cost of sales); cost formula (cost flow assumption)
(inventory method)
_______ is used for inventory items that are not ordinarily interchangeable
Specific identification
(inventory method)
[ … ] are typical used when there are large numbers of interchangeable items in inventory.
[FIFO, weighted average cost, and LIFO]
[identify inventory method]
matches the actual historical costs of the inventory items to their physical flow
Specific Identification
[identify inventory method]
the costs remain in inventory until the actual identifiable inventory is sold
Specific identification
[identify inventory method]
Companies must make certain assumptions about which goods are sold and which goods remain in ending inventory
FIFO, LIFO or Weighted Average Cost
[identify inventory method]
This method is commonly used for expensive goods that are uniquely identifiable, such as precious gemstones.
Specific Identification
[describe]
Specific Identification method
It is used for inventory items that are not ordinarily interchangeable and for goods that have been produced and segregated for specific projects.
[idnetify inventory methods]
It assumes that the oldest goods purchased (or manufactured) are sold first and the newest goods purchased (or manufactured) remain in ending inventory.
FIFO
[Describe]
FIFO
It assumes that the oldest goods purchased are sold first and the newest goods purchased remained in ending inventory.
The first units in inventory are are assumed to be the first units sold from inventory.
[Cost of Inventory]
FIFO
Cost of sales reflects the cost of goods in the beginning inventory + the cost of items purchased earliest in the accounting period.
The value of ending inventory reflects the costs of goods purchased more recently.
[Inflationary Environment]
FIFO
In periods of rising prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold.
[Deflationary Enviornment]
FIFO
In declining prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold.
[Identify Inventory Method]
It assigns the average cost of the goods available for sale (beginning inventory + purchase, conversion, and other costs) during the accounting period to the units that are sold as well as to the units in ending inventory.
Weighted Average Cost
Weighted Average Cost per Unit
Calculated as the total cost of the units available for sale divided by the total number of units available for sale in the period.
[Identify Inventory Method]
It is permitted only under US GAAP.
LIFO
[Describe]
LIFO
This method assumes that the newest goods purchased are sold first and the oldest goods purchased, including beginning inventory, remain in ending inventory.
[Cost of Inventory]
LIFO
Cost of sales reflects the cost of goods purchased more recently, and the value of ending inventory reflects the cost of older goods.
[Inflationary Environment]
LIFO
In rising prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold.
[Deflationary Environment]
LIFO
In declining prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold
