1. Applicable inventory accounting method for a particular business.

 NIKE uses LIFO for domestic inventories and FIFO for international inventories.
Firms are free to select their inventory cost-flow assumption from the set deemed
acceptable by standard-setting bodies. These bodies do not provide a set of criteria
that firms must apply to determine which inventory cost-flow assumption is
“appropriate”. The Financial Accounting Standards Board permits firms in the
United States to use FIFO, LIFO, weighted average, and several other methods.
NIKE’s use of LIFO saves income taxes during periods of rising production costs.
Given the requirement in the U.S. that firms using LIFO for tax reporting must also
use LIFO for financial reporting likely explains NIKE’s use of LIFO in the U.S. Most
other countries do not permit firms to use LIFO. Thus, NIKE’s choice set in these
countries includes FIFO and weighted average. NIKE’s probably uses FIFO because
the physical flow of its inventory is FIFO. Also, NIKE saves record keeping costs by
using FIFO for both reporting to foreign governments and reporting to its
shareholders in the U.S.

 FIFO. The first in, first out(FIFO) method is used in Apple’s inventory management.
In this method, the first items to arrive are also the first to be sold. For example, the
firm’s Apple’s iPhones, iPads, and iPods and beats headphones are managed through
the FIFO method. This inventory management method enables Apple to minimize
the accumulation of old items in storage. Financial Impact of Apple’s Inventory
Management Apple’s inventory management approaches have a beneficial impact
on the firm’s costs. For instance, the FIFO technique guarantees that most old
models are sold before new models are discharged to the market. The serialized
stock technique amplifies the proficiency of following and observing materials and
items. The blend of the distinctive sorts of stock likewise backings Apple's business
operations. These advantages prompt to operational proficiency and advanced
spending for stock administration.

 General Motors and Ford use the last-in, first-out (LIFO) method to value their
inventories. Honda (of Japan) and Daimler-Benz (manufacturer of Mercedes-Benz of
Germany) use the first-in, first-out (FIFO) method. Under LIFO, recent costs are
expensed as cost of goods sold; under FIFO, older costs are expensed as cost of
goods sold.

a. Given the income statement effects of LIFO versus FIFO, how will the balance sheet
inventory amounts differ between General Motors and Ford versus Honda and Daimler-
Benz? In other words, will inventory be reported amounts representing recent costs or
older historical costs?

GM and FORD will have older prices in their inventory amount since the most recent prices
(last-in) will be expenses in COGS. Honda and Daimler-Benz will have recent prices in their
inventory amount since the first-in (oldest prices) are expensed in COGS.

Solution Summary

Your tutorial is 272 words and explains why conservatism is not the ruling principle in
selecting inventory methods (and why) and explains how inventory will be reported for
these firms.

 The Parent Company changed its inventory costing method for petroleum products
(except for lubes and greases, waxes and solvents) from LIFO to first-in, first-out
(FIFO) method. The impact of this change increased retained earnings by —P 1,648
(net of tax effect of —P 776) as of January 1, 2004 and —P 2,162 (net of tax effect of
—P 1,017) as of December 31, 2004 and increased inventories by —P 2,424 as of
January 1, 2004 and —P 3,179 as of December 31, 2004. This accounting change
also decreased cost of goods sold by —P 755 for 2004.

 Companies most often use the weighted-average method to determine a cost for
units that are basically the same, such as identical games in a toy store or identical
electrical tools in a hardware store. When a company uses the weighted average
method and prices are rising, its cost of goods sold is less than that obtained under
LIFO, but more than that obtained under FIFO. Weighted-average costing takes a
middle-of-the-road approach. A company can manipulate income under the
weighted-average costing method bybuying or failing to buy goods near year-end.
However, the averaging process reduces the effectsof buying or not buying.

2. What are the criteria to be part of the inventory ownership of the business.

 Goods in Transit
In international business, other terms used for shipment of goods include
“Free Alongside (FAS) and “Cost, Insurance and Freight (CIF). Free along
means that the risk of loss shifts from the seller to the buyer at a named port
alongside a vessel designated by the buyer. CIF, on the other hand, means
that the seller arranges for the delivery of goods by sea to a port of
 destination. The seller also provides the buyer with the documents necessary
to obtain the goods from the carrier.

 Consigned Goods
Goods may be transferred from one party to another for purposes of sale
without the ownership and ultimate economic control changing hands. The
company delivering the goods, called consignor, retains ownership, while the
company receiving the goods, called consignee, attempts to sell them. If the
goods are sold, the consignee earns a commission and remits the net amount
to the consignor; whereas if the goods are not sold, they are returned to the
consignor.
The goods must be included in the inventory of the consignor, at cost, plus
the handling and shipping costs incurred in the delivery of the goods to the
consignee. The consignee, acting as an agent, does not own the goods; hence,
neither the peso amount of the consigned goods nor the financial obligation
for such goods is reported on its financial statements. In summary, the
consignor includes goods out on consignment in its inventory while the
consignee excludes goods held on consignment in its inventory.

 Segregated Goods
Special order goods manufactured according to customer specifications, even
if still in the possession of the selling company, should be considered as sold
when completed, and therefore excluded from the selling company’s
inventory. The rationale for this treatment is that the manufacturer
undertakes and completes the processing of the goods based on the order
and specifications by the customers. Thus, at the point of completion,
revenue is considered to have been earned, and shall, therefore, be
recognized.
 Conditional Sales and Installment Sales
Despite retention of title by the seller under the instalment contract, the
substance of the transaction is that control over the goods has already passed
to the buyer. The seller anticipates completion of the contract and the
ultimate passing of title, and therefore recognizes the transaction as a regular
sale. The seller removes the goods from the reported inventory at the time of
sale. The goods are recorded as sold when delivered and excluded from the
inventory of the seller.

 Good Sold with Buyback Agreement

A buyback agreement, accompanying sale of goods, is in substance, a from of
product financing agreement. The owner of the goods sells the inventory to
 another party and agrees to repurchase the goods at a specified price, which
covers all costs of inventory plus related holding costs. In effect, the
inventory is used as collateral for a loan obtained either directly from the
buyer, or from a financing company with the buyer as intermediary. Because
the original owner (the seller) retains the risks and rewards of ownership for
the goods, revenue is not recognized based on the principles of revenue
recognition under IAS 18 revenue. Thus, the seller should recognize a liability
for the proceeds received from the transfer and should still report the goods
as part of its inventory.

 Goods Sold with Refund Offers

In some instances, buyers are given the right to rescind the purchase of
goods for a reason specified in the sales contract. When the seller can
reasonably estimate the amount of the future returns, revenue is recognized
and the goods are removed from the inventory, with a liability being
established for the estimated returns based on previous experience and
other relevant factors. If returns are unpredictable, the seller then retains a
significant risk of ownership and revenue is not yet recognized. Hence, the
inventory is retained in the books of the seller, until such time that revenue is
recognized because of the expiration of the period for the return.