Professional Documents
Culture Documents
Chapter 8 Valuation of Inventories A Cost-Basis Approach
Chapter 8 Valuation of Inventories A Cost-Basis Approach
Coby Harmon
University of California, Santa Barbara
Westmont College
8-1
Valuation of CHAPTER 8
Inventories: A Cost-
Basis Approach
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe inventory 3. Compare the cost flow
classifications and different assumptions used to account
inventory systems. for inventories.
2. Identify the goods and costs 4. Determine the effects of
included in inventory. inventory errors on the
financial statements.
8-2
PREVIEW OF CHAPTER 8
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
8-3
LEARNING OBJECTIVE 1
Inventory Issues Describe inventory
classifications and different
inventory systems.
Classification
Inventories are asset:
items held for sale in the ordinary course of business, or
goods to be used in the production of goods to be sold.
Merchandising or Manufacturing
Company Company
8-4 LO 1
Classification
ILLUSTRATION 8.1
One inventory
account.
Purchase
merchandise in
a form ready
for sale.
8-5 LO 1
Classification
ILLUSTRATION 8.1
Three accounts
Raw Materials
Work in Process
Finished Goods
8-6 LO 1
ILLUSTRATION 8.2
Flow of Costs through
Manufacturing and
Merchandising Companies
8-7 LO 1
Inventory Issues
Perpetual System
1. Purchases of merchandise are debited to Inventory.
8-9 LO 1
Inventory Cost Flow
Periodic System
1. Purchases of merchandise are debited to Purchases.
8-10 LO 1
Inventory Cost Flow
8-11 LO 1
Inventory Cost Flow ILLUSTRATION 8.4
Comparative Entries—
Perpetual vs. Periodic
8-12 LO 1
Inventory Cost Flow
8-13 LO 1
Inventory Issues
Inventory Control
All companies need periodic verification of the inventory records
by actual count, weight, or measurement, with
counts compared with detailed inventory records.
8-14 LO 1
Inventory Issues
ILLUSTRATION 8.5
Computation of Cost
of Goods Sold
8-15 LO 1
LEARNING OBJECTIVE 2
Goods and Costs Identify the goods and costs
included in inventory.
Included an
Inventory
Goods Included in Inventory
A company recognizes inventory and accounts payable at
the time it controls the asset.
Passage of title is often used to determine control because
the rights and obligations are established legally.
8-16
LO 2
Goods Included In Inventory
Goods in Transit
Example: LG (KOR) determines ownership by applying the
“passage of title” rule.
If a supplier ships goods to LG f.o.b. shipping point, title
passes to LG when the supplier delivers the goods to the
common carrier, who acts as an agent for LG.
If the supplier ships the goods f.o.b. destination, title
passes to LG only when it receives the goods from the
common carrier.
“Shipping point” and “destination” are often designated by a
particular location, for example, f.o.b. Seoul.
8-17 LO 2
Goods Included In Inventory
Consigned Goods
Example: Williams Art Gallery (the consignor) ships various art
merchandise to Sotheby’s Holdings (USA) (the consignee), who
acts as Williams’ agent in selling the consigned goods.
Sotheby’s agrees to accept the goods without any liability,
except to exercise due care and reasonable protection from
loss or damage, until it sells the goods to a third party.
When Sotheby’s sells the goods, it remits the revenue, less a
selling commission and expenses incurred, to Williams.
Goods out on consignment remain the property of the consignor
(Williams).
8-18 LO 2
Goods Included In Inventory
8-19 LO 2
Goods Included In Inventory
Product Costs
Costs directly connected with bringing the goods to the buyer’s
place of business and converting such goods to a salable
condition.
3. Transportation costs.
8-21 LO 2
Costs Included In Inventory
Period Costs
Costs that are indirectly related to the acquisition or production
of goods.
8-22 LO 2
Costs Included In Inventory
8-23 LO 2
Treatment of Purchase Discounts
**
8-24 LO 2
LEARNING OBJECTIVE 3
Which Cost Flow Compare the cost flow
assumptions used to account
Assumptions to for inventories.
Adopt?
Cost Flow Methods
Specific Identification
or
Two cost flow assumptions
► First-in, First-out (FIFO) or
► Average Cost
8-25 LO 3
Cost Flow Methods
To illustrate the cost flow methods, assume that Call-Mart SpA
had the following transactions in its first month of operations.
8-26 LO 3
Cost Flow Methods
Average-Cost
Prices items in the inventory on the basis of the average
cost of all similar goods available during the period.
8-27 LO 3
Average-Cost
ILLUSTRATION 8.8
Weighted-Average Method Weighted-Average
Method—Periodic Inventory
8-28 LO 3
Average-Cost
ILLUSTRATION 8.9
Moving-Average Method Moving-Average Method—
Perpetual Inventory
8-29 LO 3
Cost Flow Methods
8-30 LO 3
First-In, First-Out (FIFO)
In all cases where FIFO is used, the inventory and cost of goods
sold would be the same at the end of the month whether a perpetual
or periodic system is used.
8-32 LO 3
Inventory Valuation Methods—Summary
8-33 LO 3
Inventory Valuation Methods—Summary
ILLUSTRATION 8.12
Comparative Results of
Average-Cost and FIFO
Methods
8-34 LO 3
Inventory Valuation Methods—Summary
ILLUSTRATION 8.13
Balances of Selected Items under Alternative
Inventory Valuation Methods
8-35 LO 3
APPENDIX 8A LIFO Cost Flow Assumption
LEARNING OBJECTIVE 5
Describe the LIFO cost flow assumption.
8-36 LO 5
Last-In, First-Out (LIFO)
8-37 LO 5
Last-In, First-Out (LIFO)
ILLUSTRATION 8A.1
Periodic Inventory System LIFO Method—Periodic
Inventory
The cost of the total quantity sold or issued during the month comes
from the most recent purchases.
8-38 LO 5
Last-In, First-Out (LIFO)
ILLUSTRATION 8A.2
Perpetual Inventory System LIFO Method—Perpetual
Inventory
8-39 LO 5
Inventory Valuation Methods—Summary
8-40 LO 5
Inventory Valuation Methods—Summary
ILLUSTRATION 8A.3
Comparative Results of Notice that gross profit and net income are lowest
Average-Cost and FIFO
and LIFO Methods under LIFO, highest under FIFO, and somewhere in
the middle under average-cost.
8-41 LO 5
Inventory Valuation Methods—Summary
ILLUSTRATION 8A.4
Balances of Selected LIFO results in the highest cash balance at year-end
Items under Alternative
Inventory Valuation (because taxes are lower). This example assumes that
Methods
prices are rising. The opposite result occurs if prices are
declining.
8-42 LO 5
COPYRIGHT
Copyright © 2018 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
8-43