Professional Documents
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CH 08
CH 08
PREVIEW OF CHAPTER 8
Intermediate Accounting
IFRS 2nd Edition
Kieso, Weygandt, and Warfield
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8 Valuation of Inventories:
A Cost-Basis Approach
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
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INVENTORY ISSUES
Classification
Inventories are assets:
items held for sale in the ordinary course of business, or
goods to be used in the production of goods to be sold.
Merchandising or Manufacturing
Company Company
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INVENTORY ISSUES
ILLUSTRATION 8-1
Classification
One inventory
account.
Purchase
merchandise in
a form ready
for sale.
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INVENTORY ISSUES
ILLUSTRATION 8-1
Classification
Three accounts
Raw Materials
Work in Process
Finished Goods
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INVENTORY ISSUES ILLUSTRATION 8-2
Flow of Costs through
Manufacturing and
Merchandising
Classification
Companies
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8 Valuation of Inventories:
A Cost-Basis Approach
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify major classifications of 4. Understand the items to include as
inventory. inventory cost.
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INVENTORY ISSUES
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Inventory Cost Flow
Perpetual System
1. Purchases of merchandise are debited to Inventory.
Periodic System
1. Purchases of merchandise are debited to Purchases.
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Inventory Cost Flow
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Inventory Cost Flow ILLUSTRATION 8-4
Comparative Entries—
Perpetual vs. Periodic
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Inventory Cost Flow
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INVENTORY ISSUES
Inventory Control
All companies need periodic verification of the inventory records
by actual count, weight, or measurement, with
counts compared with detailed inventory records.
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INVENTORY ISSUES
ILLUSTRATION 8-5
Computation of Cost
of Goods Sold
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Basic Issues in Inventory Valuation
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8 Valuation of Inventories:
A Cost-Basis Approach
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify major classifications of 4. Understand the items to include as
inventory. inventory cost.
2. Distinguish between perpetual and 5. Describe and compare the methods
periodic inventory systems. used to price inventories.
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PHYSICAL GOODS INCLUDED IN
INVENTORY
ILLUSTRATION 8-6
Guidelines for Determining Ownership
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GOODS INCLUDED IN INVENTORY
Goods in Transit
Example: LG (KOR) determines ownership by applying the
“passage of title” rule.
If a supplier ships goods to LG f.o.b. shipping point, title
passes to LG when the supplier delivers the goods to the
common carrier, who acts as an agent for LG.
If the supplier ships the goods f.o.b. destination, title
passes to LG only when it receives the goods from the
common carrier.
“Shipping point” and “destination” are often designated by a
particular location, for example, f.o.b. Seoul.
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GOODS INCLUDED IN INVENTORY
Consigned Goods
Example: Williams Art Gallery (the consignor) ships various art
merchandise to Sotheby’s Holdings (USA) (the consignee), who
acts as Williams’ agent in selling the consigned goods.
Sotheby’s agrees to accept the goods without any liability,
except to exercise due care and reasonable protection from
loss or damage, until it sells the goods to a third party.
When Sotheby’s sells the goods, it remits the revenue, less a
selling commission and expenses incurred, to Williams.
Goods out on consignment remain the property of the consignor
(Williams).
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GOODS INCLUDED IN INVENTORY
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GOODS INCLUDED IN INVENTORY
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GOODS INCLUDED IN INVENTORY
The effect of an error on net income in one year will be counterbalanced in the next,
however the income statement will be misstated for both years.
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Ending Inventory Misstated
Illustration: Yei Chen Corp. understates its ending inventory by
HK$10,000 in 2015; all other items are correctly stated.
ILLUSTRATION 8-8
Effect of Ending Inventory
Error on Two Periods
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GOODS INCLUDED IN INVENTORY
The understatement does not affect cost of goods sold and net income because the
errors offset one another.
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8 Valuation of Inventories:
A Cost-Basis Approach
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify major classifications of 4. Understand the items to include
inventory. as inventory cost.
2. Distinguish between perpetual and 5. Describe and compare the methods
periodic inventory systems. used to price inventories.
3. Determine the goods included in
inventory and the effects of inventory
errors on the financial statements.
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COSTS INCLUDED IN INVENTORY
Product Costs
Costs directly connected with bringing the goods to the buyer’s
place of business and converting such goods to a salable
condition.
3. Transportation costs.
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COSTS INCLUDED IN INVENTORY
Period Costs
Costs that are indirectly related to the acquisition or production
of goods.
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COSTS INCLUDED IN INVENTORY
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Treatment of Purchase Discounts
**
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8 Valuation of Inventories:
A Cost-Basis Approach
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify major classifications of 4. Understand the items to include as
inventory. inventory cost.
2. Distinguish between perpetual and 5. Describe and compare the
periodic inventory systems. methods used to price
3. Determine the goods included in inventories.
inventory and the effects of inventory
errors on the financial statements.
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WHICH COST FLOW ASSUMPTIONS TO
ADOPT?
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Cost Flow Methods
To illustrate the cost flow methods, assume that Call-Mart Inc.
had the following transactions in its first month of operations.
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Cost Flow Methods
Specific Identification
IASB requires in cases where inventories are not ordinarily
interchangeable or for goods and services produced or
segregated for specific projects.
Cost of goods sold includes costs of the specific items sold.
Used when handling a relatively small number of costly,
easily distinguishable items.
Matches actual costs against actual revenue.
Cost flow matches the physical flow of the goods.
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Cost Flow Assumptions
Average-Cost
Prices items in the inventory on the basis of the average
cost of all similar goods available during the period.
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Average-Cost
ILLUSTRATION 8-13
Weighted-Average Method Weighted-Average
Method—Periodic Inventory
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Average-Cost
ILLUSTRATION 8-14
Moving-Average Method Moving-Average Method—
Perpetual Inventory
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Cost Flow Assumptions
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First-In, First-Out (FIFO)
In all cases where FIFO is used, the inventory and cost of goods
sold would be the same at the end of the month whether a perpetual
or periodic system is used.
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Inventory Valuation Methods—Summary
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Inventory Valuation Methods—Summary
ILLUSTRATION 8-17
Comparative Results of
Average-Cost and FIFO
Methods
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Inventory Valuation Methods—Summary
ILLUSTRATION 8-18
Balances of Selected
Items under Alternative
Inventory Valuation
Methods
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8 Valuation of Inventories:
A Cost-Basis Approach
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Identify major classifications of 4. Understand the items to include as
inventory. inventory cost.
2. Distinguish between perpetual and 5. Describe and compare the methods
periodic inventory systems. used to price inventories.
3. Determine the goods included in APPENDIX 8A
inventory and the effects of inventory
errors on the financial statements. 6. Describe the LIFO cost flow
assumption.
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LAST-IN, FIRST-OUT (LIFO)
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LAST-IN, FIRST-OUT (LIFO)
ILLUSTRATION 8A-1
Periodic Inventory System LIFO Method—Periodic
Inventory
The cost of the total quantity sold or issued during the month comes
from the most recent purchases.
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LAST-IN, FIRST-OUT (LIFO)
ILLUSTRATION 8A-2
Perpetual Inventory System LIFO Method—Perpetual
Inventory
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Inventory Valuation Methods—Summary
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Inventory Valuation Methods—Summary
ILLUSTRATION 8A-3
Comparative Results of Notice that gross profit and net income are lowest
Average-Cost and FIFO
and LIFO Methods under LIFO, highest under FIFO, and somewhere in
the middle under average-cost.
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Inventory Valuation Methods—Summary
ILLUSTRATION 8A-4
Balances of Selected LIFO results in the highest cash balance at year-end
Items under Alternative
Inventory Valuation (because taxes are lower). This example assumes that
Methods
prices are rising. The opposite result occurs if prices are
declining.
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