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LIFI FIFO Methods Accounting
LIFI FIFO Methods Accounting
Thomas H. Beechy
Schulich School of Business,
York University
Joan E. D. Conrod
Faculty of Management,
Dalhousie University
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Chapter 9
Inventories
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Importance Of Inventories
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Inventory Categories
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Inventory Categories
Production inventory
Raw materials inventory - Tangible goods purchased or obtained
in other ways (e.g., by mining) and on hand for direct use in the
manufacture or further processing of goods for resale. Parts or
subassemblies manufactured before use are sometimes classified
as component parts inventory.
Work-in-process inventory - Goods or natural resources requiring
further processing before completion and sale. Work-in-process
inventory includes the cost of direct material and direct labour
incurred to date, and usually some allocation of overhead costs.
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Inventory Categories
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Invoice price
Total cash equivalent outlay made to acquire the goods and to
prepare them for sale or, for a service company, to fulfill the
requirements of the service contract.
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Beginning inventory
Purchases
Goods available for sale
Less: Sales
Ending inventory, as calculated
Ending inventory,
based on physical count
Shrinkage
500
1,000
1,500
900
600
Total
$4.00 $2,000
4.00 4,000
$6,000
580
20
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$2,000
4,000
6,000
2,320
$3,680
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Periodic Recording
Lea Company
GENERAL JOURNAL
Date
July
Description
31
Post.
Ref.
Page 7
Debit
Purchases
Accounts Payable
To Record the purchases
$4,000
$3,680
$2,320
Credit
$4,000
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$2,000
$4,000
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Perpetual Recording
Lea Company
GEN ER AL JOU RNAL
Date
July
Description
31
Post.
Ref.
Page 7
Debit
$4,000
$9,000
$3,600
Credit
$4,000
$9,000
$3,600
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Specific Identification
Average Cost
First-In, First-Out
Last-In, First-Out
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Specific Identification
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Average Cost
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Goods available:
1 January Beginning inventory
9 January Purchase
15 January Purchase
24 January Purchase
Units
Unit
Price
Total
Cost
200
300
400
100
$1.00
1.10
1.16
1.26
$ 200
330
464
126
1,000
1.12
300
1.12
336
700*
1.12
784
$ 1,120
$1,120
Date
1 January
9 January
10 January
15 January
18 January
24 January
Units
Purchases
Unit
Total
Cost
Cost
300
$1.10
400
100
Ending inventory
Cost of goods sold
Total cost allocated
(a) $530 500 = $1.06.
(b) $570 500 = $1.14.
(c) $354 300 = $1.18.
1.16
1.26
Units
Sales
Unit
Cost
Total
Cost
400
$1.06
$424
300
1.14
342
$330
464
126
$766
Inventory Balance
Unit
Total
Units Cost
Cost
200
$1.00 $200
500
1.06(a) 530
100
1.06
106
500
1.14(b) 570
200
1.14
228
300
1.18(c) 354
$354
766
$1,120
First-In, First-Out
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$ 200
920
1,120
$126
232
358
$ 762*
* Can also be calculated as 200 units on hand 1 January at $1 plus 300 units purchased
9 January at $1.10, plus 200 units purchased 15 January at $1.16.
Description
24
9 Purchases
Periodic
Post.
Ref.
Debit
Perpetual
Credit
330
126
Cash, etc.
330
126
10
31 Cost of goods sold
762
Inventory
Inventory
(closing)
358
Inventory (opening)
Jan
15 Purchases
Purchases
Jan
330
126
420
420
200
464
920
Inventory
Cash, etc.
Credit
126
330
Inventory
Jan
Jan
Debit
464
464
464
342
342
Date
1 January
Units
Purchases
Unit
Total
Cost
Cost
9 January
300
$1.10
200
200
400
1.16
100
200
100
1.26
$1.00
1.10
$200
220
464
18 January
24 January
Total
Cost
$330
10 January
15 January
Units
Sales
Unit
Cost
1.10
1.16
110
232
126
$762
Inventory Balance
Unit
Total
Units Cost
Cost
200
$1.00 $200
200
300
1.00
1.10
200
330
100
1.10
110
100
400
1.10
1.16
110
464
200
1.16
232
200
100
1.16
1.26
232
126
$358
762
$1,120
Last-In, First-Out
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Exhibit 9-7
LIFO Inventory Costing Periodic Inventory System:
$1,120
$200
110
310
$ 810*
* Can also be calculated as 100 units at $1.26 plus 400 units at $1.16 plus 200 units at $1.10.
Units
Unit
Cost
Total
Cost
300
$1.10
$330
10 January
15 January
300
100
400
1.16
300
100
1.26
$330
100
1.16
348
126
$1.10
1.00
Total
Cost
464
18 January
24 January
Units
Unit
Cost
$778
Unit
Cost
$1.00
Total
Cost
$200
200
300
1.00
1.10
200
330
100
1.00
100
100
400
1.00
1.16
100
464
100
100
1.00
1.16
100
116
100
100
100
1.00
1.16
1.26
100
116
126
Units
200
$342
778
$1,120
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Review
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Exhibit 9-9
Comparison of the Effects of FIFO vs. LIFO
The impact on
If purchase Ending
prices are: inventory is:
The impact on
Cost of goods
sold is:
The impact on
Net income and
retained
earnings is:
Rising
Falling
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Evaluation Of FIFO
Advantages
Easy to apply
Inventory value approximates current
cost
Flow of costs tends to be consistent
with usual physical flow of goods
Systematic and objective
Not subject to manipulation
Disadvantages
Does not match current cost
of goods sold with current
revenues
Inventory (or phantom) profits
In periods of rising prices, pay
higher income taxes.
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Special Aspects
Standard Cost
Just-In-Time Inventory Systems
Inventories Carried At Market Value
Losses On Purchase Commitments
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Standard Cost
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$ 70
$100
40
$ 60
10
$ 50
Method
Net realizable value
Replacement cost
Net realizable value less normal profit margin
Estimated net realizable value
Number of
companies,
1996
142
43
3
4
Source: Boyd & Chen, Financial Reporting in Canada 1997 (Toronto: CICA, 1997), p.
169.
Extent of grouping
Application of LCM can follow one of three approaches:
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LCM Applied to
Inventory Types
Classification A:
Item 1
Item 2
Classification B:
Item 3
Item 4
Cost
Individual
Market Items
Classifications
Total
Inventory valuation
under different approaches
22,000
29,000
51,000
$69,500
Total
$18,000
21,000
29,000
51,000
$67,500
$69,000
$69,500
1,000
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Disclosure
According to the inventory section of the CICA Handbook,
recommended disclosures are as follows:
the basis for valuation (e.g., historical cost, lower of cost or market,
market value) [CICA 3030.10];
major categories of inventory (desirable, not required) [CICA
3030.10];
method of determining cost, if the method used for determining cost
differs from recent cost of the inventory items [CICA 3030.11];
a definition of market value (desirable, not required), if market is
used in some aspect of inventory valuation [CICA 3030.11]; and
any change in valuation from that used in the prior period, and the
effect of a change on net income [CICA 3030.13].
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Proof of Estimate
Sa les for Ma y
Cost of goods sold:
Be ginning inve ntory
Ne t purcha se s
Cost of goods ava ilable for sa le
Estima te d ending inventory
Cost of goods sold
Gross m a rgin for Ma y
$ 1,213,000
$ 237,400
728,300
965,700
274,290
$
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521,590
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Proof of Estimate
Sa les for Ma y
Cost of goods sold:
Be ginning inve ntory
Ne t purcha se s
Cost of goods ava ilable for sa le
Estima te d ending inventory
Cost of goods sold
Gross m a rgin for Ma y
$ 1,213,000
$ 237,400
728,300
965,700
274,290
$
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Retail Method
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Retail Method
Steps To Follow
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Retail Method
Example
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Cost
$ 60,000
200,000
260,000
Retail
$
92,000
308,000
400,000
300,000
100,000
65%
$ 65,000
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Retail Method
Markups And Markdowns
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Retail Method
Markups And Markdowns
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Retail Method
Markups And Markdowns
Average
cost
=
ratio
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Retail Method
Markups And Markdowns
Lower-of-Cost-or-Market Basis
LCM
cost =
ratio
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