Inventories Level I Financial Reporting and Analysis. IFT Notes for the CFA exam

Size: px
Start display at page:

Download "Inventories. 2014 Level I Financial Reporting and Analysis. IFT Notes for the CFA exam"

Transcription

1 Inventories 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam

2 Contents 1. Introduction Cost of Inventories Inventory Valuation Methods Measurement of Inventory Value Presentation Disclosure Evaluation of Inventory Management Summary Next Steps This document should be read in conjunction with the corresponding reading in the 2014 Level I CFA Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright 2013, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights reserved. Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by Irfanullah Financial Training. CFA Institute, CFA, and Chartered Financial Analyst are trademarks owned by CFA Institute. Copyright Irfanullah Financial Training. All rights reserved. Page 2

3 1. Introduction Inventories are assets held by a company to produce finished goods for sale. Such assets include raw materials, unfinished goods and finished goods. Inventory is shown as a current asset on the balance sheet; it can represent a significant part of the total assets for many companies. Manufacturing and merchandising companies (eg: Nike, Caterpillar) generate sales and profit through the sale of inventory. An important measure in calculating profits is cost of goods sold i.e. how much cost the company incurred from procuring raw materials to converting it to a finished product, and finally selling it. There is no universal inventory valuation method. IFRS and GAAP allow different identification methods to measure the cost of inventory such as specific identification, weighted average cost, first-in, first-out, and last-in, first-out. 2. Cost of Inventories When a company spends money on inventory most of the costs are capitalized. Capitalizing means creating an asset on the balance sheet. Specifically the inventory costs that are capitalized include: Costs of purchase Costs of conversion (for converting raw material into finished product) All other costs necessary to bring inventories to its present location and condition Fixed production overhead under normal operating capacity The costs which are expensed in period incurred are: Abnormal wastage of materials Storage costs Administrative overheads Selling costs Unused portion of fixed production overhead Transportation of finished goods Copyright Irfanullah Financial Training. All rights reserved. Page 3

4 Worked Example 1: Kayvee Corporation manufactures high-end tractors. The inventory related costs are shown below: Raw materials $56,000 Direct labor $40,000 Abnormal wastage $6,000 Transportation of raw materials $10,000 Transportation of finished goods to showroom $1,000 Storage of finished product $18,000 What value of inventory is recorded? Solution: The value of inventory is based on the costs which are capitalized. These costs are: raw materials, direct labor, and transportation of raw materials: 56, , ,000 = 106,000. Note that following costs: abnormal wastage, transportation of finished goods and storage of finished product are expensed in the period incurred. 3. Inventory Valuation Methods Why do we need inventory valuation methods? Simply put, because of inflation. The cost of raw materials and the costs incurred to convert the raw materials to finished goods change over time (increase or decrease). As the inventory costs do not remain constant over this period of time, different valuation methods are used to allocate inventory costs between the cost of goods sold on the income statement and inventory on the balance sheet. What inventory valuation method a company follows is of significant importance as it affects the costs of inventory, hence the financial statements and profitability of the company. The four methods for accounting inventory are: Specific Identification FIFO (First-In, First Out) Copyright Irfanullah Financial Training. All rights reserved. Page 4

5 Weighted Average Cost LIFO (Last-In, First Out) 3.1 Specific Identification Specific identification is used when: Items are unique in nature and not interchangeable. Cost of inventory is high. Carried on the financial statements at actual cost i.e. cost of sales and ending inventory costs reflect actual costs incurred. Every item in the inventory can be tracked individually. Examples: Jewelry, expensive watches, highly valued art pieces, used cars 3.2 First-In, First-Out (FIFO) Under First-In, First-Out: Oldest goods purchased or manufactured are assumed to be sold first. Newest goods purchased or manufactured remain in ending inventory. When prices are increasing or stable, costs assigned to items in inventory is higher than the cost of items sold. The following example illustrates how cost of goods sold and inventory are accounted for each period: Let s assume you bought four pencils. The first two pencils were worth $1 each and the next two pencils were worth $2 each. Before you start selling, your inventory consists of four pencils. $1 $1 $2 $2 In period 1, you sell two pencils. The cost of pencils sold in period 1 is $2 (two pencils of $1 each). The pencils that were first bought are considered sold. Inventory at the end of period 1 is $4 and looks like this (2 pencils of $2 each): Copyright Irfanullah Financial Training. All rights reserved. Page 5

6 $2 $2 As you could see, cost of pencils sold in period 1 was $2 (cheaper pencils bought initially) whereas the cost of pencils in inventory was $4. In period 2, you again sell two pencils. The cost of pencils sold in period 2 is $4. Inventory at the end of period 2 is 0. Advantage of using FIFO is that it is less subject to manipulation. It results in higher income when prices are increasing. 3.3 Weighted Average Cost Under weighted average cost method each item in inventory is valued using an average cost of all items in the inventory. Weighted average cost = Total cost of units available for sale / total units available for sale Let s use the pencils example again to illustrate how inventory is calculated using the WAC method. Total cost of pencils available for sales = $6 Total number of pencils available for sale = 4 Weighted average cost per pencil = 6/4 = 1.5 WAC Method Item WAC (in $) Cost of 2 pencils sold in period 1 3 Inventory for 2 pencils at the end of period 1 3 Cost of 2 pencils sold in period 2 3 Inventory at the end of period 2 0 Copyright Irfanullah Financial Training. All rights reserved. Page 6

7 3.4 Last-In, First-Out Under Last-In, First-Out method: Newest goods purchased or manufactured are assumed to be sold first. Oldest goods purchased or manufactured remain in ending inventory. Cost of goods sold reflects cost of goods purchased or manufactured recently; value of inventory reflects cost of older goods purchased. We will continue with the pencils example to see how inventory is accounted for in LIFO: Unlike FIFO, at the end of period 1, LIFO inventory consists of the first two pencils: $1 $1 LIFO Method Item LIFO (in $) Cost of 2 pencils sold in period 1 4 Inventory for 2 pencils at the end of period 1 2 Cost of 2 pencils sold in period 2 2 Inventory at the end of period 2 0 LIFO is not allowed under IFRS; it is allowed only under U.S. GAAP. Companies use LIFO during inflation to reduce taxes as cost of goods sold (COGS) is high. 3.5 Calculation of cost of sales, gross profit, and ending inventory Assume each of the pencils in the example above was sold for $5. The table below summarizes the cost of goods sold, inventory ending value and gross profit under each of the methods: Inventory Accounting under Various Methods Item FIFO (in $) LIFO (in $) WAC (in $) COGS for period Copyright Irfanullah Financial Training. All rights reserved. Page 7

8 Gross profit for period Inventory at end of period COGS for period Gross profit for period Inventory at end of period Some points to be noted: The total gross profit and COGS for all the periods combined is the same under each of the methods. As the prices of pencils were increasing, the ending inventory was highest and COGS was lowest under FIFO. Similarly, the ending inventory was lowest and COGS was highest under LIFO. A summary of the three methods: Inventory Accounting FIFO Weighted average cost LIFO IFRS/GAAP Allowed under both Allowed under both Only US GAAP Item Purchased first to be No segregation. Recently purchased to sold first Contains both earliest be sold first and latest purchases COGS First purchased or Average cost Recently purchased or manufactured manufactured Ending inventory Recent purchases Average cost First purchased Worked Example 2: A company bought 400 generators at a price of $400 each on January of these generators were sold at a price of $450 each by the end of March. On April 10, 250 more generators were bought at a price of $325 each. By May 31, 225 generators were sold at a price of $500 each. For the period ending June 30, what is the ending inventory using FIFO? Solution: Copyright Irfanullah Financial Training. All rights reserved. Page 8

9 Purchased 400 Sold (300) Remainder as at March Purchased further 250 Sold (100 old new) (225) Remainder (new) 125 First in first our means that the items bought first are being sold first. Inventory amount is based on the items which are left. Hence, inventory cost = 125 * 325 = $40, Periodic Vs. perpetual inventory systems The two types of inventory systems used to keep track of changes in the inventory are: Periodic system Perpetual system Periodic system: The company measures the quantity of inventory on hand periodically. It is not a continuous process unlike the perpetual system. Purchases are recorded in a purchases account. Ending inventory is determined through a physical count of the units in inventory. Cost of goods sold (COGS) = Beginning Inventory + Purchases Ending Inventory The formula above can be rearranged to determine the value of any of the items. For example: Ending Inventory = Beginning Inventory + Purchases COGS Perpetual system: As the name implies, inventory and COGS are continuously updated in this system. Purchases and sale of units are directly recorded in the inventory as and when they occur. Important point to be noted: Specific Identification and FIFO: Periodic and perpetual systems give the same values for COGS and ending inventory. Copyright Irfanullah Financial Training. All rights reserved. Page 9

10 LIFO and WAC: Periodic and perpetual system may give different values for COGS and ending inventory. 3.7 Comparison of Inventory Valuation Methods The following table compares LIFO vs. FIFO for different parameters when prices are rising and inventory levels are stable: LIFO vs. FIFO with rising prices and stable inventory levels LIFO FIFO COGS Higher Lower Taxes Lower Higher Earnings before taxes (EBT) Lower Higher Earnings after taxes (Net Income) Lower Higher Ending inventory Lower Higher Working capital (CA-CL) Lower Higher Cash flow (after tax) Higher Lower Note: Weighted average costs provide results between FIFO and LIFO Tips for remembering the table above: 1. Remember the pencils example of $1, $1, $2 and $2. Deducing the LIFO values from this example for COGS, net income, ending inventory becomes simpler. 2. FIFO is the opposite of LIFO. Other important points: 3. Cash flow (after tax) is higher under LIFO as taxes paid are lower. 4. Companies following U.S GAAP prefer LIFO because the taxes paid are lower 5. LIFO gives a better income statement and FIFO a better balance sheet as they reflect economic reality or recent costs. Under LIFO, cost of goods sold in income statement shows the most recent costs reflecting better quality. Similarly, under FIFO, ending inventory shows the most recent costs. Copyright Irfanullah Financial Training. All rights reserved. Page 10

11 4. Measurement of Inventory Value Holding inventory for a prolonged period results in the risk of spoilage, obsolescence or decline in prices. We define some terms first before looking at the differences in how inventory is measured under IFRS and GAAP. Net realizable value: Estimated selling price under ordinary business conditions minus estimated costs necessary to get the inventory in condition for sale. NRV is from a seller s perspective. Market value: Current replacement cost subject to lower or upper limits. Market value has upper limit of net realizable value and lower limit of NRV less a normal profit margin. Market value is from a buyer s perspective. Net realizable value = estimated sales price estimated selling costs Market value limits = (NRV - normal profit margin, NRV) The following table describes how inventory is measured under IFRS and GAAP: Inventory measurement under IFRS and GAAP IFRS Lower of cost or net realizable value If NRV is less than the balance sheet cost, the inventory is written down to NRV and the loss is recognized. If value recovers subsequently, inventory can be written up and gain is recognized in income statement. The amount of gain is limited to loss previously recognized. Commodities and agricultural goods prices can be reported above historical cost. GAAP Lower of cost or market value If cost exceeds market, inventory is written down to market on balance sheet and the loss is recognized. If value recovers subsequently, no write up is allowed. Commodities and agricultural goods prices can be reported above historical cost. Copyright Irfanullah Financial Training. All rights reserved. Page 11

12 Worked Example 3 (for measurement of inventory under IFRS): In 2010, the inventory balance is 52 but the net realizable value is 49. The current replacement cost is 47. The figure exceeds the net realizable value less a normal profit margin. In 2011, the NRV was 5 greater than the carrying amount. Show the inventory values in 2010 and 2011 according to IFRS. Solution: 2010: inventory balance = 52; NRV = 49. Since NRV is lower than the balance sheet cost of 52, inventory is written down to 49. Loss recognized on income statement = : NRV = 54 as it is 5 greater than the carrying value of 49. Inventory value written up to 52. Reversal of loss in income statement limited to 3. Worked Example 4 (for measurement of inventory under GAAP): In 2010, the inventory balance is 52 but the net realizable value is 49. The current replacement cost is 47. The figure exceeds the net realizable value less a normal profit margin. In 2011, the NRV was 5 greater than the carrying amount. Show the inventory values in 2010 and 2011 according to GAAP. Solution: Here replacement cost is the market value. According to U.S, GAAP, inventory is written down to lower of cost or market value, i.e. 47 for However, you need to ensure that this number 47 is within the limits for market value (NRV and NRV- normal profit margin). 47 is less than the upper limit - i.e. 49 (net realizable value). It is also greater than the lower limit as the statement, the figure exceeds the net realizable value less a normal profit margin confirms. Inventory value for 2010 = 47. For 2011, net realizable value = 52. Inventory value for 2011 stays at 47 as writing up is not permitted under U.S GAAP. 5. Presentation Disclosure Note: Low testability but read the disclosures. Best way to remember is by going through financial statements of a few companies adopting IFRS. Think of everything related to inventory Copyright Irfanullah Financial Training. All rights reserved. Page 12

13 that must be presented carrying amount, write down, write up, how it was measure and accounting policies. IFRS requires the following financial statement disclosures concerning inventory: The accounting policies used to measure inventory, including the cost formula The total carrying amount of inventories and the carrying amount in classification (for example, merchandise, raw materials, production supplies, work in progress, and finished goods appropriate to entity) The carrying amount of inventories carried at fair value less costs to sell The amount of inventories recognized as an expense in the period (cost of sales) The amount of any reversal of any write-down recognized as a reduction in cost of sales in the period What led to the reversal of a write-down in the inventories Carrying amount of inventories pledged as a security for liabilities Disclosures under U.S. GAAP are similar to IFRS except that it does not permit reversal of write down of inventories. In addition, any income from liquidation of LIFO inventory must be disclosed. 5.1 Changes in Inventory Valuation Method A company may decide to change its inventory valuation method say from LIFO to FIFO. IFRS and U.S. GAAP stipulate certain guidelines to make such a change acceptable. If a company changes its accounting policy, the reason for the change must be justifiable. For instance, one valid reason is that the change results in the financial statements providing more reliable and reliant information. Consistency of inventory costing is required under both IFRS and GAAP. Historical reports need to be restated. Let s say a company changed its inventory accounting policy from LIFO to FIFO. Adjusting the financial statements retrospectively will help in meaningful comparison. An exemption to retrospective statement under IFRS applies when it is not practical to determine either period-specific costs or the cumulative Copyright Irfanullah Financial Training. All rights reserved. Page 13

14 effect of the change. Under U.S. GAAP, when a company changes from FIFO to LIFO, retrospective adjustments are not needed. Changes will be accounted only on a prospective basis. 6. Evaluation of Inventory Management The choice of inventory valuation method impacts various components of the financial statements such as cost of goods sold, net income, current assets and total assets. As a result, it affects the financial ratios containing these items. The table below summarizes the impact of valuation method on inventory-related ratios: Ratio Numerator Denominator Impact on ratio Inventory turnover Cost of goods sold is Average inventory is lower Higher under LIFO higher under LIFO LIFO Days of inventory No. of days are the same Higher under LIFO Lower under LIFO Total asset turnover Revenue is the same Lower average total assets under LIFO Higher under LIFO Current ratio Ending inventory is Current liabilities are the Lower under LIFO lower under LIFO so same current assets lower Gross profit margin Gross profit lower under Revenue is the same Lower under LIFO LIFO as COGS is higher Return on assets Net income lower under Lower average total assets Lower under LIFO LIFO as COGS is under LIFO higher Debt to equity Debt is the same Lower equity under LIFO. Equity = assets liabilities. Total assets under LIFO are lower as ending inventory is lower. Higher under LIFO Copyright Irfanullah Financial Training. All rights reserved. Page 14

15 Summary Note: This summary has been adapted from the CFA Program curriculum. The choice of inventory valuation method (cost formula or cost flow assumption) can have a potentially significant impact on inventory carrying amounts and cost of sales. These in turn impact other financial statement items, such as current assets, total assets, gross profit, and net income. The financial statements and accompanying notes provide important information about a company s inventory accounting policies that the analyst needs to correctly assess financial performance and compare it with that of other companies. Key concepts in this reading are as follows: Inventories are a major factor in the analysis of merchandising and manufacturing companies. Such companies generate their sales and profits through inventory transactions on a regular basis. An important consideration in determining profits for these companies is measuring the cost of sales when inventories are sold. The total cost of inventories comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition. Storage costs of finished inventory and abnormal costs due to waste are typically treated as expenses in the period in which they occurred. IFRS allow three inventory valuation methods (cost formulas): first-in, first- out (FIFO); weighted average cost; and specific identification. The specific identification method is used for inventories of items that are not ordinarily interchangeable and for goods or services produced and segregated for specific projects. U.S. GAAP allow the three methods above plus the last-in, first-out (LIFO) method. A company must use the same cost formula for all inventories having a similar nature and use to the entity. The inventory accounting system (perpetual or periodic) may result in different values for cost of sales and ending inventory when the weighted average cost or LIFO inventory valuation method is used. Under IFRS, inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the Copyright Irfanullah Financial Training. All rights reserved. Page 15

16 estimated costs necessary to make the sale. Under U.S. GAAP, inventories are measured at the lower of cost or market value. Market value is defined as current replacement cost subject to an upper limit of net realizable value and a lower limit of net realizable value less a normal profit margin. Reversals of previous write-downs are permissible under IFRS but not under U.S. GAAP. Consistency of inventory accounting policies is required under both U.S. GAAP and IFRS. If a company changes an inventory accounting policy, the change must be justifiable and all financial statements are accounted for retrospectively. The one exception is for a change to the LIFO method under U.S. GAAP; the change is accounted for prospectively, and there is no retrospective adjustment to the financial statements. The choice of inventory valuation method affects a number of items on the financial statements and any financial ratios that include inventory or cost of sales, whether directly or indirectly. As a consequence, the analyst must carefully consider differences in inventory valuation methods when evaluating a company s performance in comparison to industry performance or industry competitors performance. The inventory turnover ratio, number of days of inventory ratio, and gross profit margin ratio are useful in evaluating the management of a company s inventory. Financial statement disclosures provide information regarding the accounting policies adopted in measuring inventories, the principal uncertainties regarding the use of estimates related to inventories, and details of the inventory carrying amounts and costs. This information can greatly assist analysts in their evaluation of a company s inventory management. Next Steps Work through the examples in the curriculum. Solve the practice problems in the curriculum. Solve the IFT Practice Questions associated with this reading. Review the learning outcomes presented in the curriculum. Make sure that you can perform the implied actions. Copyright Irfanullah Financial Training. All rights reserved. Page 16

www.edupristine.com Financial Reporting & Analysis Inventories and Long-Lived Assets

www.edupristine.com Financial Reporting & Analysis Inventories and Long-Lived Assets Financial Reporting & Analysis Inventories and Long-Lived Assets Introduction Inventory price levels keep on changing over time IFRS permits the following three cost formulas: spcific identification, FIFO

More information

INVENTORY VALUATION THE SIGNIFICANCE OF INVENTORY

INVENTORY VALUATION THE SIGNIFICANCE OF INVENTORY THE SIGNIFICANCE OF INVENTORY INVENTORY VALUATION In the balance sheet inventory is frequently the most significant current asset. In the income statement, inventory is vital in determining the results

More information

Income Taxes. 2014 Level I Financial Reporting and Analysis. IFT Notes for the CFA exam

Income Taxes. 2014 Level I Financial Reporting and Analysis. IFT Notes for the CFA exam Income Taxes 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Differences between Accounting Profit and Taxable Income... 3 3. Determining the Tax

More information

Chapter 6. An advantage of the periodic method is that it is a easy system to maintain.

Chapter 6. An advantage of the periodic method is that it is a easy system to maintain. Chapter 6 Periodic and Perpetual Inventory Systems There are two methods of handling inventories: the periodic inventory system, and the perpetual inventory system With the periodic inventory system, the

More information

Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Prepared by Coby Harmon University of California, Santa Barbara Westmont College 6-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College 6 Inventories Learning Objectives After studying this chapter, you should be able to: [1] Determine how to classify

More information

Ending inventory: Ending Inventory = Goods available for sale Cost of goods sold Ending Inventory = $16,392 - $13,379 Ending Inventory = $3,013

Ending inventory: Ending Inventory = Goods available for sale Cost of goods sold Ending Inventory = $16,392 - $13,379 Ending Inventory = $3,013 BE7 1 CHAPTER 7 MERCHANDISE INVENTORY BRIEF EXERCISES The inventory purchases made by Hewlett-Packard during 2008 can be calculated as follows: Beginning inventory $ 8.0 billion + Purchases X Cost of Goods

More information

International Accounting Standards

International Accounting Standards International Accounting Standards The Key Issues in IAS 2 and 11 Background In this second of my series on international accounting standards, I have chosen to look at the two standards covering the topic

More information

Chapter 6. Inventories

Chapter 6. Inventories 1 Chapter 6 Inventories 2 Learning objectives 1. Define and identify the items included in inventory at the reporting date 2. Determine the s to be included in the value of inventory 3. Describe the four

More information

Inventories: Cost Measurement and Flow Assumptions

Inventories: Cost Measurement and Flow Assumptions CHAPTER Inventories: Cost Measurement and Flow Assumptions OBJECTIVES After careful study of this chapter, you will be able to: 1. Describe how inventory accounts are classified. 2. Explain the uses of

More information

International Accounting Standard 2 Inventories

International Accounting Standard 2 Inventories International Accounting Standard 2 Inventories Objective 1 The objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the

More information

4/10/2012. Inventories and Cost of Goods Sold. Learning Objectives (LO) Learning Objectives (LO) LO 1 Gross Profit and Cost of Goods Sold

4/10/2012. Inventories and Cost of Goods Sold. Learning Objectives (LO) Learning Objectives (LO) LO 1 Gross Profit and Cost of Goods Sold Learning Objectives (LO) Inventories and Cost of Goods Sold CHAPTER 7 After studying this chapter, you should be able to 1. Link inventory valuation to gross profit 2. Use both perpetual and periodic inventory

More information

Chapter 9: Inventories. Raw materials and consumables Finished goods Work in Progress Variants of valuation at historical cost other valuation rules

Chapter 9: Inventories. Raw materials and consumables Finished goods Work in Progress Variants of valuation at historical cost other valuation rules Chapter 9: Inventories Raw materials and consumables Finished goods Work in Progress Variants of valuation at historical cost other valuation rules 1 Characteristics of Inventories belong to current assets

More information

Chapter 8 Inventories: Measurement

Chapter 8 Inventories: Measurement Chapter 8 Inventories: Measurement AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may

More information

Chapter 6 Inventories 高立翰

Chapter 6 Inventories 高立翰 Chapter 6 Inventories 高立翰 Study Objectives 1. Describe the steps in determining inventory quantities. 2. Explain the accounting for inventories and apply the inventory cost flow methods. 3. Explain the

More information

NEPAL ACCOUNTING STANDARDS ON INVENTORIES CONTENTS Paragraphs

NEPAL ACCOUNTING STANDARDS ON INVENTORIES CONTENTS Paragraphs NAS 04 NEPAL ACCOUNTING STANDARDS ON INVENTORIES CONTENTS Paragraphs OBJECTIVE 1 SCOPE 2 5 DEFINITIONS 6 8 MEASUREMENT OF INVENTORIES 9-32 Cost of inventories 10-21 Costs of purchase 11 Costs of conversion

More information

SECTION IX. ACCOUNTING FOR INVENTORY

SECTION IX. ACCOUNTING FOR INVENTORY SECTION IX. ACCOUNTING FOR INVENTORY A. IAS 2 IAS 2 Inventories pertains to inventories that are: Assets held for sale in the ordinary course of business (finished goods and merchandise); Assets in the

More information

Financial Statement Analysis: An Introduction

Financial Statement Analysis: An Introduction Financial Statement Analysis: An Introduction 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Scope of Financial Statement Analysis... 3 3. Major

More information

Multiple-Choice Questions

Multiple-Choice Questions True-False 1 Periodic inventory systems provide a greater degree of management control over inventory. 2 In the perpetual inventory system inventory losses must be recoded in the accounts. 3 In a periodic

More information

Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability

Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability TO THE NET 1. a. 1. Quaker develops, produces, and markets a broad range of formulated chemical specialty products for various heavy

More information

CHAPTER 9 WHAT IS REPORTED AS INVENTORY? WHAT IS INVENTORY? COST OF GOODS SOLD AND INVENTORY

CHAPTER 9 WHAT IS REPORTED AS INVENTORY? WHAT IS INVENTORY? COST OF GOODS SOLD AND INVENTORY CHAPTER 9 COST OF GOODS AND INVENTORY 1 WHAT IS REPORTED AS INVENTORY? Inventory represents goods that are either manufactured or purchased for resale in the normal course of business Inventory is classified

More information

Indian Accounting Standard (Ind AS) 2 Inventories. Cost of agricultural produce harvested from biological assets 20

Indian Accounting Standard (Ind AS) 2 Inventories. Cost of agricultural produce harvested from biological assets 20 Contents OBJECTIVE Indian Accounting Standard (Ind AS) 2 Inventories Paragraphs 1 SCOPE 2-5 DEFINITIONS 6-8 MEASUREMENT OF INVENTORIES Cost of inventories 10-22 Costs of purchase Costs of conversion Other

More information

Chapter 6. Learning Objectives. Account for inventory by the FIFO, LIFO and average cost methods. Objective 1. Retail Inventory

Chapter 6. Learning Objectives. Account for inventory by the FIFO, LIFO and average cost methods. Objective 1. Retail Inventory PowerPoint to accompany Chapter 6 Retail Inventory Learning Objectives 1. Account for inventory by the FIFO, LIFO and average cost methods. 2. Compare the effects of FIFO, LIFO and average cost. 3. Apply

More information

CHAPTER 8 Valuation of Inventories: A Cost Basis Approach

CHAPTER 8 Valuation of Inventories: A Cost Basis Approach CHAPTER 8 Valuation of Inventories: A Cost Basis Approach 8-1 LECTURE OUTLINE This chapter can be covered in three to four class sessions. Students should have had previous exposure to inventory accounting

More information

SOLUTIONS. Learning Goal 27

SOLUTIONS. Learning Goal 27 Learning Goal 27: Record, Report, and Control Merchandise Inventory S1 Learning Goal 27 Multiple Choice 1. c FIFO puts the oldest costs into cost of goods sold and in a period of rising prices the oldest

More information

Chapter 8. Inventory Chapters. Learning Objectives. Learning Objectives. Inventory. Inventory. Valuation of Inventories: A Cost-Basis Approach

Chapter 8. Inventory Chapters. Learning Objectives. Learning Objectives. Inventory. Inventory. Valuation of Inventories: A Cost-Basis Approach Chapter 8 Valuation of Inventories: A Cost-Basis Approach Chapters Topic of chapters 8 and 9 : Asset on balance sheet Cost of goods sold: Expense on I/S See Safeway, Dr. Pepper, Campbell, Grainger, Amazon,

More information

Inventories: Measurement

Inventories: Measurement RECORDING AND MEASURING INVENTORY TYPES OF INVENTORY There are two types of inventories depending on the kind of business operation. Merchandise Inventory A merchandising concern buys and resells inventory

More information

* * * Chapter 15 Accounting & Financial Statements. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

* * * Chapter 15 Accounting & Financial Statements. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 15 Accounting & Financial Statements Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall Bookkeeping vs. Accounting Bookkeeping Accounting The recording of business transactions.

More information

Inventories: Cost Measurement and Flow Assumptions

Inventories: Cost Measurement and Flow Assumptions CHAPTER 8 O BJECTIVES After reading this chapter, you will be able to: 1 Describe how inventory accounts are classified. 2 Explain the uses of the perpetual and periodic inventory systems. 3 Identify how

More information

(b) financial instruments (Ind AS 32, Financial Instruments: Presentation and Ind AS 109, Financial Instruments and ); and

(b) financial instruments (Ind AS 32, Financial Instruments: Presentation and Ind AS 109, Financial Instruments and ); and Indian Accounting Standard (Ind AS) 2 Inventories (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold italic type indicate

More information

HKAS 2 Revised July 2012February 2014. Effective for annual periods beginning on or after 1 January 2005. Hong Kong Accounting Standard 2.

HKAS 2 Revised July 2012February 2014. Effective for annual periods beginning on or after 1 January 2005. Hong Kong Accounting Standard 2. HKAS 2 Revised July 2012February 2014 Effective for annual periods beginning on or after 1 January 2005 Hong Kong Accounting Standard 2 Inventories HKAS 2 COPYRIGHT Copyright 2014 Hong Kong Institute of

More information

Understanding Cash Flow Statements

Understanding Cash Flow Statements Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The

More information

Analysis of Inventories. Inventory: Asset or Expense?

Analysis of Inventories. Inventory: Asset or Expense? Analysis of Inventories Inventory: Asset or Expense? Inventories normally considered assets held for sale Comprised of: Raw materials inventory Work-in-process inventory Finished goods inventory Question:

More information

Managing Working Capital. Managing Working Capital

Managing Working Capital. Managing Working Capital Managing Working Capital Working Capital is the name given to funds invested in the short-term assets of the business. While all assets should work to produce a return on investment, it is often easier

More information

CHAPTER 6. Inventories ASSIGNMENT CLASSIFICATION TABLE. B Problems. A Problems. Brief Exercises Do It! Exercises

CHAPTER 6. Inventories ASSIGNMENT CLASSIFICATION TABLE. B Problems. A Problems. Brief Exercises Do It! Exercises CHAPTER 6 Inventories ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Do It! Exercises A Problems B Problems 1. Describe the steps in determining inventory quantities. 1, 2,

More information

R16 Inventories: Implications for Financial Statement and Ratios

R16 Inventories: Implications for Financial Statement and Ratios 2016 CFA L2 FRA R16 Felix Gui, MBA, MSF, CFA Level 3 Passed Guideline R16 Inventories: Implications for Financial Statement and Ratios Introduction Section Weight Ethics 10% Quant 5%-10% Economics 5%-10%

More information

Merchandise Inventory

Merchandise Inventory 6 Merchandise Inventory WHAT YOU PROBABLY ALREADY KNOW Assume that you want to invest in the stock market. You purchase 100 shares of a stock mutual fund in January at $24/share, another 100 shares in

More information

IPSAS 12 INVENTORIES

IPSAS 12 INVENTORIES IPSAS 12 INVENTORIES Acknowledgment This International Public Sector Accounting Standard (IPSAS) is drawn primarily from International Accounting Standard (IAS) 2 (revised 2003), Inventories published

More information

Valuation of inventories

Valuation of inventories Valuation of inventories The sale of inventory at a price greater than total cost is the primary source of income for manufacturing and retail businesses. Inventories are asset items held for sale in the

More information

Week 9/ 10, Chap7 Accounting 1A, Financial Accounting

Week 9/ 10, Chap7 Accounting 1A, Financial Accounting Week 9/ 10, Chap7 Accounting 1A, Financial Accounting Reporting and Interpreting Cost of Goods Sold and Inventory Instructor: Michael Booth Understanding the Business Primary Goals of Inventory Management

More information

Accounting Shenanigans on the Cash Flow Statement

Accounting Shenanigans on the Cash Flow Statement Accounting Shenanigans on the Cash Flow Statement 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Dispelling the Myth about Cash Flows... 3 3.

More information

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 7, 8 11, 12 10 6

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 7, 8 11, 12 10 6 CHAPTER 9 Inventories: Additional Valuation Issues ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Lower-of-cost-or-NRV. 1, 2, 3,

More information

Valuation of Inventories

Valuation of Inventories 8 Accounting Standard (AS) 2 Valuation of Inventories Contents OBJECTIVE SCOPE Paragraphs 1-2 DEFINITIONS 3-4 MEASUREMENT OF INVENTORIES 5-25 Cost of Inventories 6-13 Costs of Purchase 7 Costs of Conversion

More information

Compiled Accounting Standard AASB 102

Compiled Accounting Standard AASB 102 Compiled Accounting Standard AASB 102 Inventories This compiled Standard applies to annual reporting periods beginning on or after 1 January 2009 that end on or after 30 June 2009. Early application is

More information

Accounting. Chapter 22

Accounting. Chapter 22 Accounting Chapter 22 Merchandise inventory on hand is typically the largest asset of a merchandising business Cost of Merchandise inventory is reported on both the balance sheet and income statement The

More information

Financial Accounting. John J. Wild. Sixth Edition. McGraw-Hill/Irwin. Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Financial Accounting. John J. Wild. Sixth Edition. McGraw-Hill/Irwin. Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Accounting John J. Wild Sixth Edition McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 05 Reporting and Analyzing Inventories Conceptual Chapter

More information

Perpetual vs. Periodic Inventory Accounting

Perpetual vs. Periodic Inventory Accounting Chapter 6 INVENTORY In the balance sheet of merchandising and manufacturing companies, inventory is frequently the most significant current asset. In the income statement, inventory is vital in determining

More information

THEME: ACCOUNTING FOR INVENTORY

THEME: ACCOUNTING FOR INVENTORY THEME: ACCOUNTING FOR INVENTORY By John W. Day, MBA ACCOUNTING TERM: Inventory Inventory can be defined as goods being held for resale. In manufacturing, inventory can be raw materials, work-in-process,

More information

inven_wbn_outs_st01 Title page Inventories» What's Behind the Numbers?»» Cost Outflows» Scenic Video www.navigatingaccounting.com

inven_wbn_outs_st01 Title page Inventories» What's Behind the Numbers?»» Cost Outflows» Scenic Video www.navigatingaccounting.com Title page Inventories» What's Behind the Numbers?»» Cost Outflows» Scenic Video www.navigatingaccounting.com Agenda IFRS and US GAAP Introduction Cost methods Permissible IFRS methods Measurement Perpetual

More information

ACCT 652 Accounting. Review of last week. Review of last time (2) 1/25/16. Week 3 Merchandisers and special journals

ACCT 652 Accounting. Review of last week. Review of last time (2) 1/25/16. Week 3 Merchandisers and special journals ACCT 652 Accounting Week 3 Merchandisers and special journals Some slides Times Mirror Higher Education Division, Inc. Used by permission Michael D. Kinsman, Ph.D. Review of last week Some highlights of

More information

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 5, 6 9, 10 9

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 5, 6 9, 10 9 CHAPTER 9 Inventories: Additional Valuation Issues ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Lower of cost or market. 1, 2,

More information

Inventory (Topic 330)

Inventory (Topic 330) No. 2015-11 July 2015 Inventory (Topic 330) Simplifying the Measurement of Inventory An Amendment of the FASB Accounting Standards Codification The FASB Accounting Standards Codification is the source

More information

CHAPTER 8. Valuation of Inventories: A Cost-Basis Approach 1, 2, 3, 4, 5, 6, 8, 9. 2. Perpetual vs. periodic. 2 9, 13, 14, 17

CHAPTER 8. Valuation of Inventories: A Cost-Basis Approach 1, 2, 3, 4, 5, 6, 8, 9. 2. Perpetual vs. periodic. 2 9, 13, 14, 17 CHAPTER 8 Valuation of Inventories: A Cost-Basis Approach ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Inventory accounts; determining

More information

Intermediate Accounting

Intermediate Accounting Intermediate Accounting Thomas H. Beechy Schulich School of Business, York University Joan E. D. Conrod Faculty of Management, Dalhousie University PowerPoint slides by: Bruce W. MacLean, Faculty of Management,

More information

Section A Fundamentals of Accountancy,Chapter 4 CA (Dr.) Akash Gupta FCA, M.COM, PHD

Section A Fundamentals of Accountancy,Chapter 4 CA (Dr.) Akash Gupta FCA, M.COM, PHD Section A Fundamentals of Accountancy,Chapter 4 CA (Dr.) Akash Gupta FCA, M.COM, PHD Meaning of Inventory Types of Inventories Inventory valuation Basis of Inventory Valuation Valuation Inventory Techniques

More information

CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. True-False Statements. Multiple Choice Questions

CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. True-False Statements. Multiple Choice Questions CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT True-False Statements 1. 1 C 8. 2 C 15. 3 K 2. 1 C 9. 2 C 16.

More information

Merchandise Inventory, Cost of Goods Sold, and Gross Profit. Pr. Zoubida SAMLAL

Merchandise Inventory, Cost of Goods Sold, and Gross Profit. Pr. Zoubida SAMLAL Merchandise Inventory, Cost of Goods Sold, and Gross Profit Pr. Zoubida SAMLAL 1 Accounting for Inventory Inventory (balance sheet) = Number of units of inventory on hand X Cost per unit of inventory Cost

More information

Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

More information

Accounts Receivable 7200 Sales 7200 (No entry )

Accounts Receivable 7200 Sales 7200 (No entry ) INVENTORY. Inventory: It is defined as tangible personal property: 1. Held for sale in the ordinary course of business. 2. In the process of production for such sale. 3. To be used currently in the production

More information

Lesson 5: Inventory. 5.1 Introduction. 5.2 Manufacturer or Retailer?

Lesson 5: Inventory. 5.1 Introduction. 5.2 Manufacturer or Retailer? Lesson 5: Inventory 5.1 Introduction Whether it is a brick and mortar or digital store, for many businesses, inventory management is a key cog of their operations. Managing inventory is an important key

More information

RAPID REVIEW Chapter Content

RAPID REVIEW Chapter Content RAPID REVIEW BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6) Basic Equation Assets Owner s Equity Expanded Owner s Owner s Assets Equation = Liabilities Capital Drawing Revenues Debit

More information

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 5, 6 9, 10 9 6

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 5, 6 9, 10 9 6 CHAPTER 9 Inventories: Additional Valuation Issues ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Lower-of-cost-or-market. 1, 2,

More information

Principlesofaccounting.com

Principlesofaccounting.com Principlesofaccounting.com chapter 8 Inventory Your goals for this inventory chapter are to learn about: The correct components to include in inventory. Inventory costing methods, including specific identification,

More information

Chapter 35 - Inventories

Chapter 35 - Inventories Chapter 35 - Inventories 35.10 Inventories 35.10.10 Policies in this chapter are minimum standards Sept. 1, 2004 35.10.15 Authority for these policies Sept. 1, 2004 35.10.20 Applicability Sept. 1, 2004

More information

Click to edit Master title style. Inventories

Click to edit Master title style. Inventories 1 7 Inventories 1 2 After studying this chapter, you should be able to: 1. Describe the importance of control over inventory. 2. Describe three inventory cost flow assumptions and how they impact the income

More information

CHAPTER 8 INVENTORIES AND THE COST OF GOODS SOLD

CHAPTER 8 INVENTORIES AND THE COST OF GOODS SOLD CHAPTER 8 INVENTORIES AND THE COST OF GOODS SOLD OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Brief Exercises Topic Learning Objectives Skills B. Ex. 8.1 FIFO inventory

More information

CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES. MULTIPLE CHOICE Conceptual

CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES. MULTIPLE CHOICE Conceptual CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES Answer No. Description MULTIPLE CHOICE Conceptual d 1. Knowledge of lower of cost or market valuations. d 2. Appropriate use of LCM valuation. c 3. Definition

More information

BUS312A/612A Financial Reporting I. Homework Inventory Chapter 8

BUS312A/612A Financial Reporting I. Homework Inventory Chapter 8 BUS312A/612A Financial Reporting I Homework Inventory Chapter 8 Objectives Chapter 8 You should be able to Discuss the relevance of inventory methods Compare the periodic and perpetual inventory systems

More information

EXERCISES. Ex. 6 1. Ex. 6 2

EXERCISES. Ex. 6 1. Ex. 6 2 EXERCISES Ex. 6 1 Switching to a perpetual inventory system will strengthen A4A Hardware s internal controls over inventory, since the store managers will be able to keep track of how much of each item

More information

CHAPTER 6 T E A C H E R V E R S I O N

CHAPTER 6 T E A C H E R V E R S I O N Inventories CHAPTER 6 T E A C H E R V E R S I O N Describe the importance of control over inventory. Control of Inventory LO 1 Two primary objectives of control over inventory are: 1. Safeguarding the

More information

AAT LEVEL 3 LESSON 7. Association of Accounting Technicians (AAT) Example Course Materials

AAT LEVEL 3 LESSON 7. Association of Accounting Technicians (AAT) Example Course Materials LESSON 7 Account for the Valuation of Inventory On completing this lesson you should be able to: Identify categories of inventory as referred to within the accounting standard IAS 2 (Inventories) Explain

More information

ILLUSTRATION 9-1 LCM INVENTORY VALUATION

ILLUSTRATION 9-1 LCM INVENTORY VALUATION ILLUSTRATION 9-1 LCM INVENTORY VALUATION APPLICATION OF LOWER OF COST OR MARKET CEILING COST Net Realizable (NRV) Replacement Cost NRV Normal Profit Margin FLOOR Select the Middle STEP 1: Determine the

More information

Tax Accounting: Valuation of Inventories: A Cost Basis Approach under GAAP

Tax Accounting: Valuation of Inventories: A Cost Basis Approach under GAAP Tax Accounting: Valuation of Inventories: A Cost Basis Approach under GAAP Adopted in part from Kieso, Weygandt, and Warfield s Intermediate Accounting and Originally prepared by Jep Robertson and Renae

More information

Financial Reporting and Analysis Chapter 9 Solutions Inventories. Exercises. Exercises. E9-1. Account analysis (AICPA adapted)

Financial Reporting and Analysis Chapter 9 Solutions Inventories. Exercises. Exercises. E9-1. Account analysis (AICPA adapted) Exercises E9-1. Account analysis (AICPA adapted) Financial Reporting and Analysis Chapter 9 Solutions Inventories Exercises To find merchandise inventory, we first need to find cost of goods sold. This

More information

Salem Community College Course Syllabus. Section I. Course Title: Principles Of Accounting I. Course Code: ACC121

Salem Community College Course Syllabus. Section I. Course Title: Principles Of Accounting I. Course Code: ACC121 Salem Community College Course Syllabus Section I Course Title: Principles Of Accounting I Course Code: ACC121 Lecture Hours: 4 Lab Hours: 0 Credits: 4 Course Description: An introduction to accounting

More information

ACCOUNTING DICTIONARY

ACCOUNTING DICTIONARY ACCOUNTING DICTIONARY A Account a record summarizing all the information pertaining to a single item in the accounting equation Account balance the amount in an account Account number the number assigned

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

of Goods Sold and Inventory

of Goods Sold and Inventory Date: 10th July 2008 Time: 12:03 User ID: narayanansa 6 Cost of Goods Sold and Inventory After studying Chapter 6, you should be able to: ä 1 ä 2 ä 3 ä 4 ä 5 ä 6 ä 7 ä 8 ä 9 Describe the types of inventories

More information

With 11,000 employees serving 2 million customers weekly,

With 11,000 employees serving 2 million customers weekly, Chapter 13 MARK LENNHIAN/AP PHOTO PHOTO: CARY BENBOW LEARNING OBJECTIVES Careful study of this chapter should enable you to: LO1 Explain the impact of merchandise inventory on the financial statements.

More information

Ch6. Student: 2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement.

Ch6. Student: 2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement. Ch6 Student: 1. Inventory is usually reported as a long-term asset in the balance sheet. 2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income

More information

Accounting 1. Lesson Plan. Topic: Accounting for Inventory Unit: 4 Chapter 23

Accounting 1. Lesson Plan. Topic: Accounting for Inventory Unit: 4 Chapter 23 Accounting 1 Lesson Plan Name: Terry Wilhelmi Day/Date: Topic: Accounting for Inventory Unit: 4 Chapter 23 I. Objective(s): By the end of today s lesson, the student will be able to: define accounting

More information

Accounting 303 Exam 3, Chapters 7-9 Fall 2013 Section Row

Accounting 303 Exam 3, Chapters 7-9 Fall 2013 Section Row Accounting 303 Name Exam 3, Chapters 7-9 Fall 2013 Section Row I. Multiple Choice Questions. (2 points each, 28 points in total) Read each question carefully and indicate your answer by circling the letter

More information

Time Value of Money. Reading 5. IFT Notes for the 2015 Level 1 CFA exam

Time Value of Money. Reading 5. IFT Notes for the 2015 Level 1 CFA exam Time Value of Money Reading 5 IFT Notes for the 2015 Level 1 CFA exam Contents 1. Introduction... 2 2. Interest Rates: Interpretation... 2 3. The Future Value of a Single Cash Flow... 4 4. The Future Value

More information

CHAPTER 8 VALUATION OF INVENTORIES: A COST BASIS APPROACH. MULTIPLE CHOICE Conceptual

CHAPTER 8 VALUATION OF INVENTORIES: A COST BASIS APPROACH. MULTIPLE CHOICE Conceptual CHAPTER 8 VALUATION OF INVENTORIES: A COST BASIS APPROACH Answer No. Description MULTIPLE CHOICE Conceptual d 1. Entries under perpetual inventory system. b 2. Classification of goods in transit. a 3.

More information

Financial Ratios and Quality Indicators

Financial Ratios and Quality Indicators Financial Ratios and Quality Indicators From U.S. Small Business Administration Online Women's Business Center If you monitor the ratios on a regular basis you'll gain insight into how effectively you

More information

Inventories. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Feb 25 / Mar 1, 2004

Inventories. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Feb 25 / Mar 1, 2004 Inventories 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Feb 25 / Mar 1, 2004 1 Inventory Definition: Inventory is defined

More information

Module 9.1 Accounting, Costing and ERP

Module 9.1 Accounting, Costing and ERP Module 9.1 Accounting, Costing and ERP By Wipawii Jaraswarapan Business Consultant, ecosoft wipawii@gmail.com ADempiere ERP 1 2 Module Objectives Business vs Accounting vs ERP Accounting and Costing fundamental

More information

Accounting Principles Critical to Success Presented By: C. P. Krishnan. www.cakintl.com

Accounting Principles Critical to Success Presented By: C. P. Krishnan. www.cakintl.com Accounting Principles Critical to Success Presented By: C. P. Krishnan Basic Accounting You Need to Know Assets, Liabilities, Equity, Income, & Expenses Assets Includes what you have and what people owe

More information

Chapter 4: Business Valuation (Adjusted Book Value or Cost Approach)

Chapter 4: Business Valuation (Adjusted Book Value or Cost Approach) Chapter 4: Business Valuation (Adjusted Book Value or Cost Approach) In adjusting the balance sheet, the most difficult task is to mark to market (substitute market values for book values) the assets and

More information

ACC 120 PRINCIPLES OF FINANCIAL ACCOUNTING

ACC 120 PRINCIPLES OF FINANCIAL ACCOUNTING ACC 120 PRINCIPLES OF FINANCIAL ACCOUNTING COURSE DESCRIPTION: Prerequisites ENG 090, and RED 090 or DRE 098; MAT 070 or DMA 010, 020, 030, 040, or satisfactory score on placement test Corequisites: None

More information

Investments Advance to subsidiary company 81,000

Investments Advance to subsidiary company 81,000 EXERCISE 7-3 (10 15 minutes) Current assets Accounts receivable Customers Accounts (of which accounts in the amount of $40,000 have been pledged as security for a bank loan) $79,000 Installment accounts

More information

Glossary of Accounting Terms Peter Baskerville

Glossary of Accounting Terms Peter Baskerville Glossary of Accounting Terms Peter Baskerville Account for or 'bring to account': An accounting phrase used to describe the recording of a financial transaction that is required under the generally accepted

More information

ACCOUNT DEBIT CREDIT Accounts receivable 10,000 Sales 10,000 To record the sale of merchandise to Sophie Company

ACCOUNT DEBIT CREDIT Accounts receivable 10,000 Sales 10,000 To record the sale of merchandise to Sophie Company CURRENT RECEIVABLES Receivables are the amount owed to the organization by its customers and/or others. Current receivables will be collected within one year or the current operating cycle which ever is

More information

LEMBAGA HASIL DALAM NEGERI MALAYSIA INLAND REVENUE BOARD

LEMBAGA HASIL DALAM NEGERI MALAYSIA INLAND REVENUE BOARD INLAND REVENUE BOARD PUBLIC RULING VALUATION OF STOCK IN TRADE. PUBLIC RULING NO. 4/2006 DATE OF ISSUE: 31 MAY 2006 CONTENTS Page 1. Introduction 1 2. Interpretation 1 3. Importance of stock in trade valuation

More information

Time Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam

Time Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam Time Value of Money 2014 Level I Quantitative Methods IFT Notes for the CFA exam Contents 1. Introduction... 2 2. Interest Rates: Interpretation... 2 3. The Future Value of a Single Cash Flow... 4 4. The

More information

CHAPTER 9. Inventories ASSIGNMENT CLASSIFICATION TABLE. Brief. B Problems. A Problems. 1. Describe the steps in determining inventory quantities.

CHAPTER 9. Inventories ASSIGNMENT CLASSIFICATION TABLE. Brief. B Problems. A Problems. 1. Describe the steps in determining inventory quantities. CHAPTER 9 Inventories ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems 1. Describe the steps in determining inventory quantities. 4, 5, 6, 7, 8,

More information

Inventory and Cost of Goods Sold

Inventory and Cost of Goods Sold 9 Inventory and Cost of Goods Sold Overview Chapter 9 is quite long and covers a number of issues involving both inventory and cost of goods sold. Hopefully, you learned something about inventory methods

More information

MGT402 - Cost & Management Accounting Glossary For Final Term Exam Preparation

MGT402 - Cost & Management Accounting Glossary For Final Term Exam Preparation MGT402 - Cost & Management Accounting Glossary For Final Term Exam Preparation Glossary Absorption costing : Includes all manufacturing costs --- including direct materials, direct labor, and both variable

More information

Accounting for inventory. www.brightpearl.com

Accounting for inventory. www.brightpearl.com Accounting for inventory Whats inside Accounting for your inventory is as important as accounting for your sales. Every product you have on the shelf has a cost value, and the total cost of goods is likely

More information

Income Taxes - Practice Questions Irfanullah.co

Income Taxes - Practice Questions Irfanullah.co 1. Using accelerated method of depreciation for reporting purposes and straight-line method for tax purposes would most likely result in a: A. Temporary difference. B. Valuation allowance. C. Deferred

More information

Financial ratio analysis

Financial ratio analysis Financial ratio analysis A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Liquidity ratios 3. Profitability ratios and activity ratios 4. Financial leverage ratios 5. Shareholder

More information