HIGHLIGHTS OF CHAPTER 8: Inventories: Measurement March 2004 March 2004

INVENTORY ISSUES  Merchandising v manufacturing  Perpetual v periodic  Include/exclude from count?  Include/exclude from costs?  Cost flow assumptions

INVENTORY ISSUES  Specific identification  FIFO  LIFO  Average cost  Dollar-value LIFO

MERCHANDISING V MANUFACTURING  Raw materials  Work-in-process  Materials used  Direct Labor  Manufacturing overhead  Finished goods

PERPETUAL V PERIODIC  Inventory formula  Perpetual – focus on costs of goods sold  Periodic – focus on costs of ending inventory

INCLUDE/EXCLUDE FROM COUNT?  FOB shipping v destination  Consigned goods  Goods from sales returns

INCLUDE/EXCLUDE FROM COST?  Condition & location  Product v period costs  Freight-in  Purchase returns  Purchase discounts  Gross method  Net method  Interest costs

COST FLOW ASSUMPTIONS  Specific identification  Average cost  FIFO  LIFO

LIFO  LIFO reserve & effect  LIFO liquidation  Unit (specific goods) approach  Specific goods pooled approach  Dollar-value approach

LIFO ADVANTAGES  Tax benefits  Matching  Improved cash flow

LIFO DISADVANTAGES  Reduced earnings  Inventory understated  Physical flow  Current cost not measured  Involuntary liquidation  Timing purchases

DECISION MAKING  Just-in-time inventory  Gross profit (margin) ratio  Inventory turnover  Days sales in inventory

DOLLAR-VALUE LIFO  Base-year prices  LIFO layers  Price indexes  Double-extended calculation of indexes