Ringkas CHPTR 6

PELAPORAN DAN AKUNTANSI KEUANGAN
“INVENTORIES”
NAMA : FLAYER PUASA

NIM : 19062103007
A. Classifying and Determining Inventory

1. Classifying Inventory
a. Merchandising Company
One Classification:
 Inventory
b. Manufacturing Company
Three Classifications:
 Raw Materials
 Work in Process
 Finished Goods
2. Determining Inventory Quantities
a. Physical Inventory taken for two reasons:
a) Perpetual System
 Check accuracy of inventory records.
 Determine amount of inventory lost due to wasted raw materials, shoplifting, or
employee theft.
b) Periodic System
 Determine the inventory on hand.
 Determine the cost of goods sold for the period.
b. Taking A Physical Inventory
Involves counting, weighing, or measuring each kind of inventory on hand.
Companies often “take inventory”
 when the business is closed or business is slow.
 at the end of the accounting period.
c. Determining Ownership Of Goods
Goods In Transit
 Purchased goods not yet received.
 Sold goods not yet delivered.
3. Inventory is accounted for at cost.
a. Cost includes all expenditures necessary to acquire goods and place them in a
condition ready for sale.
b. Unit costs are applied to quantities to compute the total cost of the inventory and
the cost of goods sold using the following costing methods:
 Specific identification
 First-in, first-out (FIFO)
 Average-cost
B. Inventory Costing
1. Specific Identification
Actual physical flow costing method in which items still in inventory are specifically
costed to arrive at the total cost of the ending inventory.
 Practice is relatively rare.
 Most companies make assumptions (cost flow assumptions) about which units
were sold.
2. Cost Flow Assumptions
There are two assumed cost flow methods:
 First-in, first-out (FIFO)
 Average-cost
Cost flow does not need be consistent with the physical movement of the goods.
a. First-In, First-Out (Fifo)
 Costs of the earliest goods purchased are the first to be recognized in
determining cost of goods sold.
 Often parallels actual physical flow of merchandise.
 Companies obtain the cost of the ending inventory by taking the unit cost of the
most recent purchase and working backward until all units of inventory have
been costed.
b. Average-Cost
 Allocates cost of goods available for sale on the basis of weighted-average unit
cost incurred.
 Applies weighted-average unit cost to the units on hand to determine cost of the
ending inventory.
3. Financial Statement and Tax Effects of
Cost Flow Methods
Either of the two cost flow assumptions is acceptable for use. For example,
 adidas (DEU) and Lenovo (CHN) use the average-cost method, whereas
 Syngenta Group (CHE) and Nokia (FIN) use FIFO.
A recent survey of IFRS companies, approximately
 60% use the average-cost method,
 40% use FIFO, and
 23% use both for different parts of their inventory.
a. Income Statement Effects
b. Statement Of Financial Position Effects

 A major advantage of the FIFO method is that in a period of inflation, the
costs allocated to ending inventory will approximate their current cost.
 A major shortcoming of the average-cost method is that in a period of inflation,
the costs allocated to ending inventory may be understated in terms of current
cost.
c. Tax Effects
 Both inventory and net income are higher when companies use FIFO in a
period of inflation.
 Average-cost results in the lower income taxes (because of lower net income)
during times of rising prices.
4. Using Cost Flow Methods Consistently
a. Method should be used consistently, enhances comparability.
b. Although consistency is preferred, a company may change its inventory costing
method.
Cost Flow Assumptions
question
In periods of rising prices, average-cost will produce:
a. higher net income than FIFO.
b. the same net income as FIFO.
c. lower net income than FIFO.
d. net income equal to the specific identification method.
Factors that affect the selection of an inventory costing method do not include:
a. tax effects.
b. statement of financial position effects.
c. income statement effects.
d. perpetual vs. periodic inventory system.
5. Lower-of-Cost-or-Net Realizable Value
When the value of inventory is lower than its cost
 companies must “write down” the inventory to its net realizable value.
Net realizable value: Amount that a company expects to realize (receive from the sale
of inventory).
Illustration: Assume that Gao TV has the following lines of merchandise with costs and market
values as indicated.
C. Inventory Errors
Common Causes:
 Failure to count or price inventory correctly.
 Not properly recognizing the transfer of legal title to goods in transit.
 Errors affect both the income statement and statement of financial position.
1. Income Statement Effects
Inventory errors affect the computation of cost of goods sold and net income in two
periods.
Inventory errors affect the computation of cost of goods sold and net income in two periods.
 An error in ending inventory of the current period will have a reverse effect on
net income of the next accounting period.
 Over the two years, the total net income is correct because the errors offset
each other.
 Ending inventory depends entirely on the accuracy of taking and costing the
inventory.
2016 2017
Incorrect Correct Incorrect Correct
Sales € 80,000 € 80,000 € 90,000 € 90,000
Beginning inventory 20,000 20,000 12,000 15,000
Cost of goods purchased 40,000 40,000 68,000 68,000
Cost of goods available 60,000 60,000 80,000 83,000
Ending inventory 12,000 15,000 23,000 23,000
Cost of good sold 48,000 45,000 57,000 60,000
Gross profit 32,000 35,000 33,000 30,000
Operating expenses 10,000 10,000 20,000 20,000
Net income € 22,000 € 25,000 € 13,000 € 10,000
Combined income for (€3,000) €3,000

2-year period is Net income Net income
correct. understated overstated
question
Atlantis Company’s ending inventory is understated NT$122,000. The effects of this error on
the current year’s cost of goods sold and net income, respectively, are:
 understated, overstated.
 overstated, understated.
 overstated, overstated.
 understated, understated.
2. Statement of Financial Position Effects
Effect of inventory errors on the statement of financial position is determined by using the basic
accounting equation: Assets = Liabilities + Equity.
Errors in the ending inventory have the following effects.
LCNRV Basis; Inventory Errors

a. Tracy Company sells three different types of home heating stoves (wood, gas, and
pellet). The cost and net realizable value of its inventory of stoves are as follows.
Determine the value of the company’s inventory under the lower-of-cost-or-net realizable value
approach.
Total inventory value is the sum of these amounts, NT$430,000.
b. Visual Company overstated its 2016 ending inventory by NT$22,000. Determine the
impact this error has on ending inventory, cost of goods sold, and equity in 2016 and
2017.
2016 2017
Ending inventory NT$22,000 overstated No effect
Cost of goods sold NT$22,000 understated NT$22,000 overstated
Equity
D. Statement Presentation and Analysis

1. Presentation
Statement of Financial Position - Inventory classified as current asset.
Income Statement - Cost of goods sold is subtracted from sales.
There also should be disclosure of the
a. major inventory classifications,
b. basis of accounting (cost or LCNRV), and
c. costing method (specific identification, FIFO, or average-cost).
2. Analysis
Inventory management is a double-edged sword
a. High Inventory Levels - may incur high carrying costs (e.g., investment, storage,
insurance, obsolescence, and damage).
b. Low Inventory Levels – may lead to stock-outs and lost sales.
Inventory turnover measures the number of times on average the inventory is sold during the
period.
Cost Of Gods Solds

=
Inventory Turnover =
Average Inventory
Days in inventory measures the average number of days inventory is held.
Days In Year (365)

Days Infentory =
Inventory Turnover

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PELAPORAN DAN AKUNTANSI KEUANGAN

NAMA : FLAYER PUASA

A. Classifying and Determining Inventory

b. Statement Of Financial Position Effects

Combined income for (€3,000) €3,000

LCNRV Basis; Inventory Errors

D. Statement Presentation and Analysis

Cost Of Gods Solds

Days in inventory measures the average number of days inventory is held.

Days In Year (365)

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