Chapter 6 - Inventory Valuation1 INVENTORY – Chapt 6. p.277-284 BALANCE SHEET Biggest Asset  see example How can an inventory item be both raw materials.

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Presentation transcript:

Chapter 6 - Inventory Valuation1 INVENTORY – Chapt 6. p BALANCE SHEET Biggest Asset  see example How can an inventory item be both raw materials and finished goods at the same time? INCOME STATEMENT Biggest Expense Manufacturer inventory  

Chapter 6 - Inventory Valuation2 The Audiophile sells high end stereo equipment. Windsor Acoustics recently introduced the Carnegie 440, a state of the art speaker system. During the current year the Audiophile purchase 9 of these speaker systems at the following dates and acquisition costs:

Chapter 6 - Inventory Valuation3 The problem is that acquisition costs change so how is inventory evaluated? Date Units Purchased Unit CostTotal Cost Oct Nov Dec Total928600

Chapter 6 - Inventory Valuation4 Average cost method assumes that goods available for sale are homogeneous

Chapter 6 - Inventory Valuation5 On November 21, The Audiophile sold 4 of these speaker systems to the Hamilton Symphony for $5000 per unit. At December 31, the other 5 sets remained in inventory. Compute and journalize the COGS and the ending inventory value based on the average inventory costs: Value of remaining inventory is:

Chapter 6 - Inventory Valuation6 FIFO method assumes earliest goods purchased are the first to be sold

Chapter 6 - Inventory Valuation7 On November 21, The Audiophile sold 4 of these speaker systems to the Hamilton Symphony for $5000 per unit. At December 31, the other 5 sets remained in inventory. Compute and journalize the COGS and the ending inventory value based on the “First In –First Out” (FIFO) inventory cost: Value of remaining inventory is:

Chapter 6 - Inventory Valuation8 Average vs. FIFO AverageFIFO Income Statement Balance Sheet

Chapter 6 - Inventory Valuation9 LIFO method assumes latest goods purchased are the first to be sold

Chapter 6 - Inventory Valuation10 On November 21, The Audiophile sold 4 of these speaker systems to the Hamilton Symphony for $5000 per unit. At December 31, the other 5 sets remained in inventory. Compute the COGS and the ending inventory value based on the “Last In – Last Out” (LIFO) inventory costs: Value of remaining inventory is:

Chapter 6 - Inventory Valuation11 USING INVENTORY COST FLOW METHODS CONSISTENTLY A company needs to use its chosen cost flow method consistently from one accounting period to another. Such consistent application enhances the comparability of financial statements over successive time periods. When a company adopts a different cost flow method, the change and its effects on net income should be disclosed in the financial statements.