Format n n 24 (maybe 25) questions 24 (maybe 25) questions Final Exam Review l l Multiple choice (15) l l True/False (4) l l Problem (5) http://fates.cns.muskingum.edu/~ plaube/acct301/ Expenditures Included in Inventory What to Bring/Remember n n What to bring l l Calculator l ll bring scrap paper l I’ I ’ll bring scrap paper Invoice Invoice Price Price Purchase Purchase Returns Returns n n Remember to try to make it legible – If I can’’t tell what you’
legible – If I can t tell what you ’re doing, it’
doing, it ’s hard to give partial credit. + Freight­in on Freight­in on Purchases Purchases Inventory Cost Flow Methods nn n Specific cost Specific cost identification identification nn n Average cost Average cost nn n First­ ­in, first in, first­ ­out (FIFO) out (FIFO) First First­in, first­out (FIFO) nn n Last­ ­in, first in, first­ ­out (LIFO) out (LIFO) Last Last­in, first­out (LIFO) Purchase Purchase Discounts Discounts First­ In, First­ ­Out Out First ­In, First The FIFO method assumes that items are sold in the chronological order of their acquisition.
n nn The cost of the The cost of the oldest inventory oldest inventory items are charged to items are charged to COGS when goods COGS when goods are sold. are sold. n nn The cost of the The cost of the newest inventory newest inventory items remain in items remain in ending inventory. ending inventory. 1 Last­ In, First­ ­Out Out Last ­In, First The LIFO method assumes that the newest items are sold first, leaving the older units in inventory. When Prices Are Rising . . . n nn The cost of the The cost of the newest inventory newest inventory items are charged items are charged to COGS when to COGS when goods are sold. goods are sold. n nn The cost of the The cost of the oldest inventory oldest inventory items remain in items remain in inventory. inventory. costs with current costs with current (higher) sales. (higher) sales. n nn Inventory is valued Inventory is valued approximates approximates replacement cost. replacement cost. n nn Results in higher Results in higher taxable income. taxable income. Dollar­ Value LIFO (DVL) Dollar ­Value LIFO (DVL) DVL minimizes the DVL minimizes the probability of layer probability of layer liquidation. liquidation. At the end of the Example At the end of the Example period, we determine if period, we determine if The replacement The replacement a new inventory layer a new inventory layer inventory differs from inventory differs from was added by was added by the old inventory on the old inventory on comparing ending comparing ending hand. We just create a hand. We just create a inventory to beginning inventory to beginning new layer. new layer. inventory. inventory. Ending Ending Inventory = Inventory ÷ at base Cost year cost costs with current costs with current (higher) sales. (higher) sales. n n
n Inventory is valued based Inventory is valued based on low (older) cost basis. on low (older) cost basis. n n
n Results in lower taxable Results in lower taxable income. . income income. n n
n Is not officially endorsed Is not officially endorsed by the IASC. by the IASC. We need to determine if the increase in We need to determine if the increase in ending inventory over beginning inventory ending inventory over beginning inventory was due to a price increase or an increase was due to a price increase or an increase in inventory. in inventory. 1a. Compute a 1a. Compute a Cost Index for the Cost Index for the year. year. Cost index Cost in in layer = layer year year ÷ Cost in base year (USUALLY GIVEN) (USUALLY GIVEN) Dollar­ Value LIFO (DVL) Dollar ­Value LIFO (DVL) 1b. Deflate the 1b. Deflate the ending ending inventory inventory value using value using the cost index. the cost index. nn Matches high (newer) n Matches high (newer) Dollar­ Value LIFO (DVL) Dollar ­Value LIFO (DVL) DVL inventory pools are viewed as layers DVL inventory pools are viewed as layers of value, rather than layers of similar units. of value, rather than layers of similar units. DVL simplifies LIFO DVL simplifies LIFO record­keeping. record­keeping. LIFO LIFO FIFO FIFO n nn Matches low (older) Matches low (older) Dollar­ Value LIFO (DVL) Dollar ­Value LIFO (DVL) Cost Index 1c. Compare 1c. Compare Change in ending ending Ending inventory (at inventory (at Inventory/ Inv. at Beg. base year New = – base year Base Year Inventory cost) to Inventory cost) to Cost beginning Layer beginning inventory. inventory. 1d. 1d. Recalculate Recalculate the cost of the cost of each layer each layer using that using that year’s cost year’s cost index index Ending Inventory = x Inventory layer Cost Index
2 Lower of Cost or Market (LCM) GAAP requires that inventories be GAAP requires that inventories be carried at cost or current market carried at cost or current market value, whichever is lower. value, whichever is lower. LCM is a departure from historical cost LCM is a departure from historical cost and is a conservative accounting and is a conservative accounting method. method. Determining Market Value If replacement cost > Ceiling, then Ceiling = Market Value Net Realizable Value (Ceiling) Replacement Replacement Cost Cost If replacement cost < Floor, then Floor = Market Value Net Realizable Value less Normal Profit (Floor) Inventory Estimation Techniques n n Estimate instead of taking physical inventory l l Less costly THANKS! l l Less time consuming n n Two popular methods are . . . Good luck in all your future pursuits!
pursuits! l l Gross Profit Method l l Retail Inventory Method 3