Class 14 Chapter 7 Inventories and cost of goods soldRecap of last timeQuestion 1Question 2PlanLIFO LiquidationSlide 7Lower of cost or market - LCMFinancial Statement AnalysisFinancial Statement AnalysisSlide 11PP3: LIFO Liquidation…PP3: LIFO LiquidationPP4 (LIFO liquidation)PP4, cont.Errors in Measuring InventoryPP5PP6Next Class1Class 14Chapter 7 Inventories and cost of goods soldAccounting 2610Xiumin2/26/20132Recap of last timeTwo inventory system:Perpetual periodicInventory valuation methodsSpecific identificationWeighted-average FIFOLIFO3Question 1Questions:1.For periods of rising price, what is the relation for the above itmes?2.For periods of decling price, what is the relation for the above itmes?4Question 2For which method, Inventory on the Balance Sheet reflects most current costsCOGS on the Income Statement reflects most current costsA) FIFOB) LIFOC) WAC5PlanLIFO issuesLIFO liquidationLCMInventory turnover article Errors in inventory PP6LIFO LiquidationOccurs when a LIFO company sells more units than it purchases. ResultOld LIFO layers built up in the past are liquidatedCosts of items from beginning inventory enter cost of goods sold.Current sales prices matched against old costsDistorts (i.e. yields unrealistically high, if old costs are lower) gross profit, net income and related ratios The advantages of having updated COGS disappearSubstantial tax payments7LIFO LiquidationUnintentional LIFO liquidation may occur due toSupplier’s strike or other disturbances in supplyUnanticipated demandIntentional LIFO liquidation may occur in an attempt to pad incomeIn periodic LIFO, delaying purchases may lead to liquidation of old layersLIFO may be used to manipulate income8Lower of cost or market - LCMLCM is an exception to the historical cost principleIf the replacement cost of our inventory units falls, we need to decrease the value of inventory below what we calculatedWe do not want to over state our inventory (conservatism).An increase in the replacement cost will not get reflected until we actually sell the inventory. This assumes that along with the replacement cost decline, there was a decline in the price in which we will sell the product. That is, our future benefits went down.9Financial Statement AnalysisInventory Turnover Cost of Goods Sold = Average InventoryInventory TurnoverAverage Inventory is calculated as:(Beginning Inventory + Ending Inventory) ÷ 210Financial Statement Analysis Rank these firms from lowest to Inventory turnover:Papa JohnsWal-MartNordstrom Target McDonaldsEmerson1 3 4Purchasemerchandisefrom supplierSell merchandiseto customerCollect cash fromcustomertimeInventory cycleReceivable cycle11Financial Statement Analysis1 3 4Purchasemerchandisefrom supplierSell merchandiseto customerCollect cash fromcustomertimeInventory cycleReceivable cycle12PP3: LIFO LiquidationRegis Retail company began business in 1999. The following is info pertaining to its first 3 years of operation:Assume an income tax of 40%.13…PP3: LIFO LiquidationRequirement:Compute LIFO COGS and ending inventory for each of the three years. Identify number of units and cost per unit for each LIFO layer in ending inventory.Calculate the COGS and ending inventory under FIFO.What was the difference between net income under FIFO and LIFO?14PP4 (LIFO liquidation)Mani Company has been using LIFO for its inventory valuation for many years. Therefore, Mani’s inventory is priced with 1960 prices. It is Dec. 29, 2001, and Mani is deciding if they should order 1,000 units of inventory for $50/unit immediately and receive shipment on Dec. 31, or delay receiving the shipment until Jan. 2, 2002. Mani’s net income is less than the stock market expects, and therefore Mani is under great pressure to increase measured profits for 2001. Its inventory account on Dec. 29 prior to the purchase decision reveals the following:15PP4, cont.If Mani desires to “inflate” 2001 profits, should it receive shipment of inventory on Dec. 29 or Jan. 2? Justify your answer with numerical evidence showing the differences in net incomes and inventory valuations under the 2 scenarios.16Errors in Measuring Inventory17PP5If the 2000 ending inventory is understated by $3,000, which of the following is true for 2000?a. Beginning Inventory was understated.b. Cost of Goods Sold will be understated.c. Gross Profit will be overstated.d. Net Income will be understated.If the 2000 ending inventory is understated by $3,000, which of the following is true for 2000?a. Beginning Inventory was understated.b. Cost of Goods Sold will be understated.c. Gross Profit will be overstated.d. Net Income will be understated.18PP6If the 2000 ending inventory is understated by $3,000, which of the following is true for 2001?a. Beginning Inventory was understated.b. Cost of Goods Sold will be understated.c. Gross Profit will be overstated.d. All of the above.If the 2000 ending inventory is understated by $3,000, which of the following is true for 2001?a. Beginning Inventory was understated.b. Cost of Goods Sold will be understated.c. Gross Profit will be overstated.d. All of the above.19Next ClassChapter
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