Financial Accounting- BUS 020 - Spring 2015 Session 9 Inventories.

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Financial Accounting- BUS Spring 2015 Session 9 Inventories

Financial Accounting- BUS Spring 2015 Inventory Components n Material n Labor n Overhead

Financial Accounting- BUS Spring 2015 Inventory Categories n Raw Materials n Work in Process (WIP) n Finished Goods

Financial Accounting- BUS Spring 2015 Manufacturing Cost Flows BI I O EI RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS B O/H R/M B O/H WIP B O/H F/G R/M PURCHASES TRANSFERS TO WIP E O/H R/M R/M TRANSFERS DIR. LABOR MFG OVERHEAD MANUFACTURING COSTS COST OF GOODS MANUFACTURED (COGM) E O/H WIP COGM COST OF GOODS SOLD (COGS) E O/H F/G P&L

Financial Accounting- BUS Spring 2015 Key Inventory Issues n Acquisition costs n Carrying methods n Cost flow assumption n Valuation

Financial Accounting- BUS Spring 2015 Inventory Acquisition n What units n What costs

Financial Accounting- BUS Spring 2015 Cost Basis n Sacrifice to put into use n Components n Net price n Freight n Production n Preparation n Fees n N.B.....future benefit

Financial Accounting- BUS Spring 2015 Inventory Methods n Perpetual n B + I - O = E n Periodic n B + I - E = O

Financial Accounting- BUS Spring 2015 Cost Flow Assumption n Specific ID n Averaging n FIFO…first in; first out n LIFO…last in; first out n Applies to costs only, NOT physical movement n Disclose both values n Use same method for book and tax

Financial Accounting- BUS Spring 2015 Management and LIFO n Use in periods of rising prices n Tax advantages n Will lower reported profits, so consider bonus impact

Financial Accounting- BUS Spring 2015 Inventory Valuation n Lower of Cost or Market n Obsolescence n Slow moving items

Financial Accounting- BUS Spring 2015 Inventory Analysis n Inventory turnover or turns n COGS / Average ending inventory n Days in inventory n Ending inventory / Avg. Daily COGS