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Inventory Valuation

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M
mscuttle

Inventory is an important asset on the balance sheet and impacts the income statement through cost of goods sold. There are two main concerns with inventory valuation - revenue recognition and ending inventory valuation. Companies must count inventory quantities and value them at cost, with adjustments made if the lower of cost or market is below cost. Common inventory costing methods include specific identification, first-in first-out, last-in first-out, and average cost.

BusinessEconomy & Finance
1 of 25
The Significance of Inventory ,[object Object],[object Object],[object Object],[object Object],[object Object]
Perpetual vs. Periodic ,[object Object],[object Object],[object Object],[object Object],[object Object]
Ending Inventory Valuation ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Items in Merchandise Inventory ,[object Object],[object Object],[object Object]
Costs of Merchandise Inventory ,[object Object],[object Object]
Method 1: Specific Identification ,[object Object],[object Object],[object Object]
Method 2: Cost Flow Methods ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
FIFO (First In, First Out) ,[object Object],[object Object],[object Object],[object Object]
FIFO method assumes earliest goods purchased are the first to be sold
LIFO (Last In, First Out) ,[object Object],[object Object],[object Object]
LIFO method assumes latest goods purchased are the first to be sold
Average Cost ,[object Object],[object Object]
Allocation of the cost of goods available for sale in average cost method is made on the basis of the weighted average unit cost
Average cost method assumes that goods available for sale are homogeneous
Income Statement Effects ,[object Object],[object Object],[object Object],Balance Sheet Effects ,[object Object]
The Consistency Gaap ,[object Object],[object Object],[object Object]
Inventory Errors – Income Statement Effects ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Inventory Error – Balance Sheet Effects ,[object Object],[object Object],Overstated Overstated None Overstated Understated Understated None Understated
Lower of Cost or Market ,[object Object],[object Object],[object Object]
LCM - Product 55,000 45,000 100,000 45,000 14,000 59,000 159,000 Television Sets 166,000 168,000 Total Inventory 59,000 63,000 Total 14,000 15,000 Movies 45,000 48,000 Recorders Video Equipment 107,000 105,000 Total 52,000 45,000 HDTV 55,000 60,000 Standard Market Cost Valuation
LCM - Category 105,000 59,000 164,000 Television Sets 166,000 168,000 Total Inventory 59,000 63,000 Total 14,000 15,000 Movies 45,000 48,000 Recorders Video Equipment 107,000 105,000 Total 52,000 45,000 HDTV 55,000 60,000 Standard Market Cost Valuation
LCM – Total Inventory 166,000 Television Sets 166,000 168,000 Total Inventory 59,000 63,000 Total 14,000 15,000 Movies 45,000 48,000 Recorders Video Equipment 107,000 105,000 Total 52,000 45,000 HDTV 55,000 60,000 Standard Market Cost Valuation
Lower of Cost or Market ,[object Object]
Merchandise Turnover ,[object Object],[object Object],[object Object],Merchandise Turnover = Cost of Goods Sold Average Merchandise Inventory
Day’s Sales in Inventory ,[object Object],Day’s Sales in inventory = Ending Inventory Cost of Goods Sold X 365

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Inventory Valuation

  • 1.
  • 2.
  • 3.
  • 4.
  • 5.
  • 6.
  • 7.
  • 8.
  • 9. FIFO method assumes earliest goods purchased are the first to be sold
  • 10.
  • 11. LIFO method assumes latest goods purchased are the first to be sold
  • 12.
  • 13. Allocation of the cost of goods available for sale in average cost method is made on the basis of the weighted average unit cost
  • 14. Average cost method assumes that goods available for sale are homogeneous
  • 15.
  • 16.
  • 17.
  • 18.
  • 19.
  • 20. LCM - Product 55,000 45,000 100,000 45,000 14,000 59,000 159,000 Television Sets 166,000 168,000 Total Inventory 59,000 63,000 Total 14,000 15,000 Movies 45,000 48,000 Recorders Video Equipment 107,000 105,000 Total 52,000 45,000 HDTV 55,000 60,000 Standard Market Cost Valuation
  • 21. LCM - Category 105,000 59,000 164,000 Television Sets 166,000 168,000 Total Inventory 59,000 63,000 Total 14,000 15,000 Movies 45,000 48,000 Recorders Video Equipment 107,000 105,000 Total 52,000 45,000 HDTV 55,000 60,000 Standard Market Cost Valuation
  • 22. LCM – Total Inventory 166,000 Television Sets 166,000 168,000 Total Inventory 59,000 63,000 Total 14,000 15,000 Movies 45,000 48,000 Recorders Video Equipment 107,000 105,000 Total 52,000 45,000 HDTV 55,000 60,000 Standard Market Cost Valuation
  • 23.
  • 24.
  • 25.