Chapter 7 McGrawHillIrwin 2009 The McGrawHill Companies Inc Inventory Costing Methods Total Dollar Amount of Goods Available for Sale Ending Inventory Cost of Goods Sold Inventory Costing Method ID: 671994
Download Presentation The PPT/PDF document "Reporting and Interpreting Cost of Goods..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Reporting and Interpreting Cost of Goods Sold and Inventory
Chapter 7
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.Slide2
Inventory Costing Methods
Total Dollar Amount of Goods Available for Sale
Ending Inventory
Cost of Goods Sold
Inventory Costing Method
Inventory Costing Methods
Specific Identification
First-in, First-out
Last-in, First-out
Weighted AverageSlide3
Specific Identification
When units are sold, the specific cost of the unit sold is added to
cost of goods sold.Slide4
Cost Flow AssumptionsThe choice of an inventory costing method is not based on the physical flow of goods on and off the shelves.
LIFO
FIFO
Weighted
AverageSlide5
First-In, First-Out Method
Cost of Goods Sold
Oldest Costs
Ending Inventory
Recent CostsSlide6
First-In, First-Out
Remember: The costs of most
recent purchases
are in ending inventory. Start with 11/29 and add units purchased until you reach the number in ending inventory.Slide7
First-In, First-Out
Now, we have allocated the cost to all 1,200 units in ending inventory.Slide8
First-In, First-Out
Now, we have allocated the cost to all 1,050 units sold.Slide9
First-In, First-Out
Here is the cost of ending inventory and cost of goods sold using FIFO.Slide10
Last-In, First-Out Method
Ending Inventory
Cost of Goods Sold
Oldest Costs
Recent CostsSlide11
Last-In, First-Out
Remember: The costs of the
oldest purchases
are in ending inventory. Start with beginning inventory and add units purchased until you reach the number in ending inventory.Slide12
Last-In, First-Out
Now, we have allocated the cost to all 1,200 units in ending inventory.Slide13
Last-In, First-Out
Now, we have allocated the cost to all 1,050 units sold.Slide14
Last-In, First-Out
Here is the cost of ending inventory and cost of goods sold using LIFO.Slide15
Average Cost Method
When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.
Cost of Goods Available for Sale
Number of Units Available for Sale
÷Slide16
Average Cost MethodSlide17
Comparison of MethodsSlide18
Financial Statement Effects of Costing Methods
Advantages of Methods
Better matches current costs in cost of goods sold with revenues.
Ending inventory approximates current replacement cost.
First-In, First-Out
Last-In, First-Out
Smoothes out price changes.
Weighted AverageSlide19
Managers Choice of Inventory Methods
Net Income Effects
Managers prefer to report higher earnings for their companies.
Income Tax Effects
Managers prefer to pay the least amount of taxes allowed by law as late as possible.
LIFO Conformity Rule
If last-in, first-out is used on the income tax return, it must also be used to calculate inventory and cost of goods sold for financial statements.Slide20
LIFO and International Comparisons
LIFO Permitted?
Yes
No
China
Singapore
Canada
Great Britain
Australia
IFRS also Prohibits the use of LIFOSlide21
Go to Excel Assignment #2www.acct20100.comSlide22
Work AP7-1 (page 389)