9: Why Does a Company Need a Cost Flow Assumption in Reporting Inventory?
- Page ID
- 24743
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 9.1: The Necessity of Adopting a Cost Flow Assumption
- This page explains the importance of standardized accounting rules and cost flow assumptions in inventory reporting, focusing on FIFO, LIFO, and averaging methods under U.S. GAAP. It emphasizes how these choices affect financial statements, with LIFO generally providing tax advantages during inflation by lowering net income and inventory values. In contrast, averaging can complicate implementation.
- 9.2: The Selection of a Cost Flow Assumption for Reporting Purposes
- This page explains the importance of inventory and cost of goods sold under U.S. GAAP, focusing on cost flow assumptions like FIFO, LIFO, and averaging. The choice of method affects financial statements, particularly during inflation. The LIFO conformity rule requires companies using LIFO for taxes to do the same in financial reports, often leading to lower income figures.
- 9.3: Problems with Applying LIFO
- This page discusses the prohibition of LIFO (Last In, First Out) under IFRS, primarily due to outdated inventory values that misrepresent profitability. While LIFO benefits U.S. tax deferral, it is banned in many countries for failing to reflect current market conditions. The complications from LIFO liquidations further inflate reported earnings by using older costs. As a result, companies outside the U.S. must adopt FIFO or average costing methods, leading to potential cash implications for U.S.
- 9.4: Merging Periodic and Perpetual Inventory Systems with a Cost Flow Assumption
- This page explains how students will combine cost flow assumptions (FIFO, LIFO, averaging) with inventory monitoring methods (periodic, perpetual) to create six inventory reporting systems. It highlights the identical results of periodic and perpetual FIFO in calculating ending inventory and cost of goods sold, emphasizing the periodic system's reliance on physical counts and the perpetual system's continuous transaction recording. Both ultimately yield the same inventory and cost figures.
- 9.5: Applying LIFO and Averaging to Determine Reported Inventory Balances
- This page describes learning objectives regarding inventory costing methods, focusing on LIFO and averaging systems. It contrasts periodic and perpetual LIFO systems using Mayberry Home Improvement Store as a case study, demonstrating their effects on financial figures such as gross profit. It also covers weighted average and moving average systems, detailing the calculation of average costs and their application in financial reporting.
- 9.6: Analyzing Reported Inventory Figures
- This page covers converting LIFO to FIFO figures, computing gross profit percentage, average inventory holding days, and inventory turnover. It addresses challenges in comparing companies using different inventory accounting methods, noting that LIFO leads to lower net income and inventory values during inflation. Key metrics such as inventory turnover are emphasized for performance evaluation. Analyst Kevin G.
- 9.7: End-of-Chapter Exercises
- This page discusses accounting issues centered on inventory management and cost determination methods, including periodic and perpetual LIFO, weighted average, and moving average. It provides transaction details for Highlander Corporation and Sew Cool and includes a scenario for Webworks, which involves journal entries, T-accounts, trial balances, and financial statements from September. These exercises serve to reinforce accounting principles and facilitate analysis.