Lecture 9 Outline of Last Lecture II. Financial Statement “Flow” on Inventory III

ACCTG 211 1st Edition Lecture 9 Outline of Last Lecture II. Financial Statement “Flow” on Inventory III. The Inventory Roll forward IV. Inventory Cash Flow Assumptions V. Financial Statement Flow on Inventory VI. Two key questions VII. FIFO, LIFO, Average Cost Flow Example Outline of Current Lecture I. Cost Flow Accounting Methods II. Transportation Costs III. Purchase Discounts IV. Effects of Inventory Errors V. Valuation Costs VI. Gross Profit Method Current Lecture I. Important Items from Unit 4 a. Financial Statement “Flow” of Inventory i. Appears first on the Balance Sheet, then transferred to Income Statement as Inventory is sold b. Inventory Cost Flow Assumptions i. Specific ID, FIFO, LIFO, Weighted-Average Cost ii. Remember: companies may use any cost flow assumption, regardless of what they use for the “physical flow” of inventory in the business c. Ending Inventory and COGS: Periodic vs. Perpetual Methods i. Be ready for FIFO, LIFO, Weighted-Average Cost via Periodic Method ii. Only LIFO and FIFO for Perpetual Method d. Lower of Cost or Market i. Conservatism – compare, then take the lower value to the Balance Sheet ii. Replacement Cost is often used as “market” value for comparison These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. e. Gross Profit Method of Estimating Ending Inventory i. Often used in interim reporting periods or for insurance purposes ii. Makes use of “gross profit percentage” to estimate COGS, which is then used to estimate Ending Inventory f. FOB-Related Charges i. Determine who owns the inventory when it is “in transit” ii. Freight-In: account used by buyer to capitalize FOB-related charges iii. Freight-Out: account used by seller to expense FOB-related charges g. Discounts i. Offered to increase speed with which cash is collected h. Effect of Inventory Errors i. Inventory errors affect two financial statements (B/S and I/S) in two different accounting periods ii. Overstated / Understated COGS and Overstated / Understated Inventory II. Reasons for using different styles of Cost Flow Accounting methods a. FIFO: Ending Inventory more closely approximates the replacement cost of the inventory i. Thus, the most recent costs are included in the ending inventory balance (a more realistic balance sheet) b. LIFO: COGS more closely approximates the replacement cost of the inventory i. Thus, the most recent costs are included in the COGS and Gross Profit (a more realistic income statement) c. Ave Cost: Smooth out price fluctuations, presenting a balance between favoring either the balance sheet or income statement III. Transportation Costs a. Question: Does GAAP allow companies to “capitalize” the costs of shipping Inventory? i. FOB (free on board) is a shipping term that indicates the point in the shipping process where legal title of merchandise passes from the seller to the buyer. b. Example: We own an import business, and we purchase goods from China to be sold in the United States. The goods will be shipped from Hong Kong to New York. i. If ownership of the merchandise passes to the buyer at the point of origin (i.e., Hong Kong), the shipping terms are said to be FOB (free on board) shipping point. ii. If ownership of the merchandise passes to the buyer at the point of delivery (i.e., New York), the shipping terms are said to be FOB (free on board) destination point. iii. Who (buyer or seller) owns the inventory while it is “in transit” under each case?.

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