Valuation of Inventories u Major Classifications of Inventories –Merchandising –Manufacturing »raw materials »work-in-process »finished goods u Inventory Management & Control –Perpetual System –Periodic System u Basic Inventory Valuation

Valuation of Inventories (cont.) u Physical Goods to be Included –Goods in transit »f.o.b. shipping point »f.o.b. destination –Consigned goods »consignor owns the goods »consignee tries to sell them –Special sale agreements »Sales with buy-back agreements »Sales with high rate of return »sales on installment

Valuation of Inventories (cont.) u Inventory Errors –ending inventory misstated –beginning inventory misstated –both misstated –purchases misstated

Valuation of Inventories (cont.) u Costs to be Included in Inventory –Product costs –Period costs –Manufacturing costs –Variable versus absorbtion costing –Purchase discounts u Cost Flow Assumptions –Specific identification –First In, First Out (FIFO) –Last In, Last Out (LIFO) –Average Cost

Valuation of Inventories (cont.) u Special LIFO Problems –LIFO liquidations –LIFO pools u Basis for Cost Flow Assumption Selection u Summary

Inventories: Additional Valuation Problems u Lower of Cost or Market –Ceiling and floor –Methods of applying lower of cost or market –Recording market instead of cost –Evaluation of lower of cost or market rule u Valuation at Net Realizable Value u Valuation Using Relative Sales Value u Purchase Commitments u Financial Statement Presentation & LIFO Reserve