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Chapter 5 Conceptual chapter objectives (2)
- 1. Identify the items making up merchandise inventory
- 2. Identify the costs of merchandise inventory.
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Chapter 5 analytical chapter objectives
- 1. Analyze the effects of inventory methods for both financial and tax reporting
- 2. Analyze the effects of inventory errors on current and future financial statements
- 3. Assess inventory management using both inventory turnover and days' sales in inventory.
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Chapter 5 procedural objectives
- 1. Compute inventory in a perpetual
- system using the methods of specific identification, FIFO, LIFO, and weighted
- average.
- 2. Compute the lower of cost or
- market amount of inventory.
- 3. Compute inventory in a periodic
- system using the methods of specific identification, FIFO, LIFO, and weighted
- average (see text for details).
- 4. Apply both the retail inventory
- and gross profit methods to estimate inventory (see text for details).
-
Merchandise inventory includes goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include: (3)
- 1. goods in transit
- 2. goods in consignment
- 3. goods damaged or absolete
-
FIFO (first-in, first-out)
assumes cost flow in the order incurred.
-
LIFO (Last-in, first-out)
Assumes cost flow in the reverse order incurred.
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Weighted average
assumes costs flow at an average of the costs available.
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Advantage of the Weighted Average method
smooths out price changes
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Advantage to FIFO method
ending inventory approximates current replacement cost.
-
avantage of LIFO method
better matches current costs in costs of goods sold with revenues.
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Inventory must be reported at market value when...
"market" is lower than cost.
-
define market:
as current replacement cost (not sales price_. Consistent with the conservatism constraint
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Lower of Cost or Market can be applied three ways
- 1. separately to each individual item
- 2. to major categories of items
- 3. to the whole inventory
-
Financial statement effects of inventory errors
by having an inventory error it affects Cost of goods sold and Net income in an income statement
-
In the Balance sheet what are the financial statement effects of inventory errors?
an inventory error affects assets and equity.
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