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What We Learn


What We Learn. T-account for Inventory. Valuation Criteria. Inventory ... sheet, and report unrealized loss, but ask: where the unrealized loss is placed? ... – PowerPoint PPT presentation

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Title: What We Learn

What We Learn
  • T-account for Inventory
  • Valuation Criteria
  • Inventory System
  • Cost Flow Assumptions
  • Inventory Estimation
  • More financial statement analysis

T Account
  • Beginning
  • New purchase
  • COGS
  • Ending Inventory

Inventory Valuation
  • Is inventory an asset?
  • two types of uncertainties can you sell?
  • Valuation Criteria
  • Historical cost
  • market value replacement cost (
    purchasing costs ) or net
  • realizable cost ( selling price
    selling cost)
  • Canadian practice Lower of cost and

Inventory Values
  • Acquisition costs invoice price any costs
    related to inventory purchase except for
    transportation in ( shipping costs) and cartage
  • Shipping costs and cartage costs are added into
    inventory costs as period costs, i.e.
  • beginning purchase shipping cartageending
  • Lower of cost and market ( net realizable cost is
  • direct method show lower of cost and
    market on balance sheet and report unrealized
    loss, but ask where the unrealized loss is
  • Allowance method using contra account
    (Loss due to market decline of inventory), show
    both inventory and contra accounts on balance
    sheet, and report unrealized loss, but ask where
    the unrealized loss is placed?

Inventory Systems
  • Perpetual inventory system record inventory
    reduction at the time of sale two journal
  • Periodic inventory system no record inventory
    reduction at the time of sale one journal entry
  • Benefit-cost trade-off cost? current
    information? Inventory shrinkage?

Cost Flow Assumptions
  • Inventory record for individual inventory units
    specific identification
  • Pooled inventory cost flow assumptions
  • FIFO first in, first out
  • LIFO last in, first out
  • Weighted average average cost for both COGS
    and ending inventory
  • Differences among cost flow assumptions
  • if no inflation or deflation, three
    assumptions yield the same numbers.
  • During the period of inflation or deflation,
    the difference depends on the change in price,
    size of inventory and inventory turnover.

Inventory Estimation
  • Cost to sales ratio COGS /sales
  • can be applied with periodic system
  • can be used in planning

Financial Statement Analysis
  • Inventory turnover COGS/average inventory
  • Interpretation the higher the better
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