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InventoriesInventoryInventoryInventory: Lower of cost or market. Why?InventoryThe “Ins” and “Outs” of Inventory AccountingWhich costs ($) come out?The Key EquationWhich costs go in?Inventory in a Manufacturing FirmInventory in a Manufacturing FirmInventory in a Manufacturing FirmInventory in a Manufacturing FirmInventory in a Manufacturing FirmInventory in a Manufacturing FirmInventory in a Manufacturing FirmInventory in a Manufacturing FirmInventory in a Manufacturing FirmKeeping track of inventory quantities:Perpetual vs. Periodic Inventory SystemsWhich costs ($) come out?LIFO vs FIFO exampleLIFO vs FIFO exampleLIFO vs FIFO exampleFIFO – Conveyer BeltLIFO vs FIFO exampleLIFO – Cookie JarLIFO vs FIFO exampleLIFO vs FIFO example - FIFOLIFO vs FIFO example - FIFOLIFO vs FIFO example - FIFOLIFO vs FIFO example – FIFOLIFO vs FIFO example - LIFOLIFO vs FIFO example - LIFOLIFO vs FIFO example - LIFOLIFO vs FIFO example - LIFOLIFO versus FIFOLIFOLIFO vs FIFO exampleLIFO Layers exampleLIFO layers and transactionsWhat is LIFO COGS?What is LIFO COGS?LIFO Layers exampleWhat is LIFO COGS?What is LIFO COGS?LIFO Inventory IncentivesLIFO Inventory IncentivesLIFO Inventory IncentivesLIFO Liquidation ProfitsLIFO vs. FIFO--Which is a Better Measure of Future IncomeConversion from LIFO to FIFO -- The LIFO reserveWhat is FIFO Inventory?FIFO Inventory & LIFO reserveConversion from LIFO to FIFO -- The LIFO reserve exampleLIFO versus FIFO COGSLIFO versus FIFO COGSFootnote DisclosuresAnalyzing Footnote DisclosuresLIFO and FIFO Inventory TurnoverLIFO and FIFO Inventory TurnoverSummary for Inventories1Inventories15.501/516 AccountingSpring 2004Professor S. RoychowdhurySloan School of ManagementMassachusetts Institute of TechnologyFeb 25 / Mar 1, 20042Inventoryz Definition: Inventory is defined as goods held for sale in the normal course of business or items used in the manufacture of products that will be sold in the normal course of business3Inventoryz Definition: Inventory is defined as goods held for sale in the normal course of business or items used in the manufacture of products that will be sold in the normal course of businessz Inventory is recorded on the balance sheet at the lower of the cost or the market value of the inventory.4Inventory: Lower of cost or market. Why?$B/S Inventory valueCostInventory value on thebalance sheetMarket value of Inventory5Inventoryz Definition: Inventory is defined as goods held for sale in the normal course of business or items used in the manufacture of products that will be sold in the normal course of businessz The inventory is recorded on the balance sheet at the lower of the cost or the market value of the inventory.z The cost of inventory includes all costs necessary to bring the inventory to a saleable condition.6The “Ins” and “Outs” of Inventory AccountingThe “ins” of inventory accountingThe “outs” of inventory accountingCost of goods available for saleCost of goods soldEndinginventoryAcquisition costsBeginninginventoryBInv + Purchases = COGAS = COGS + EInv7Which costs ($) come out?Acquisition costsCost of goods available for saleCost of goods soldEndinginventoryBeginninginventoryBInv + Purchases = COGAS = COGS + EInvz How do we determinez which costs are expensed in COGS andz which costs remain in EInv?ÎNeed a cost flow assumption8The Key EquationInventoryBeg. InventoryPurchases/ProductionCost of goods soldEnd. InventoryBeg. inventory + purchases/production - COGS = End. inventory9Which costs go in?z What units to includez FOB shipping point or destination: who owns goods in transit?z What costs to attach to the unitsz The cost of inventory includes all costs necessary to bring the inventory to a saleable condition.z All costs to acquire, manufacture, preparez Includes shipping costs for retailersz Includes overhead costs (as well as direct labor and materials) for manufacturersz More on this in managerial accounting …10Inventory in a Manufacturing FirmMaterialsDirect LaborOverheadWork in ProcessFinishedGoodsCash or Payables11Inventory in a Manufacturing FirmMaterialsDirect LaborOverheadWork in ProcessFinishedGoodsCash or Payables12Inventory in a Manufacturing FirmBuying of inputsDirect Material xxDirect Labor xxOverhead xxPayables or cash xx(payment of salaries, purchase of materials)13Inventory in a Manufacturing FirmMaterialsDirect LaborOverheadWork in ProcessFinishedGoodsCash or Payables14Inventory in a Manufacturing FirmUse inputs to manufacture goodsWork in Process xxDirect Material xxDirect Labor xxOverhead xx(Use of inputs in production)15Inventory in a Manufacturing FirmCash or PayablesMaterialsWork in ProcessFinishedGoodsDirect LaborOverhead16Inventory in a Manufacturing FirmTransfer finished products from shop floor to warehouseFinished Goods xxWork in Process xx(production of goods completed)17Inventory in a Manufacturing FirmCash or PayablesMaterialsWork in ProcessFinishedGoodsDirect LaborOverheadCost of Goods Sold18Inventory in a Manufacturing FirmSell goods to customersCost of Goods Sold xxFinished Goods xx(finished goods are sold to customers)19Keeping track of inventory quantities:Perpetual vs. Periodic Inventory Systemsz How do we know how much has been sold?z Perpetual system: tracks units sold directlyz more accurate, more timely, potentially more costlyz Periodic system: infer quantities sold by using purchases/production, beginning and ending inventories.z Units sold = Beg. Units + Production – End. Unitsz harder to detect inventory “shrinkage” (e.g., theft, spoilage) as well as management fraud20Which costs ($) come out?Acquisition costsCost of goods available for saleCost of goods soldEndinginventoryBeginninginventoryz BInv + Purchases = COGAS = COGS + EInvz How do we determinez which costs are expensed in COGS andz which costs remain in EInv?z ÎNeed a cost flow assumption21LIFO vs FIFO exampleLIFO and FIFO are two assumptions about the physical flow of inventory used to determine cost of goods sold and the ending inventoryaccount balance.The actual physical flow of inventory neednot correspond to these assumptions.22LIFO vs FIFO exampleFIFO -- First In First OutLIFO -- Last In First Out23LIFO vs FIFO exampleBeginning Inventory PurchasesGoods available for saleThe accountant must separate goods availablefor sale into End. Inv. and COGS. This separationis done based on the physical flow assumption.24FIFO – Conveyer BeltFIFO (conveyor belt)Beg.


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MIT 15 501 - Inventories

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