ACCT 200 Lecture 9 Outline of Last Lecture II. Classifying and Determining InventoryIII. Inventory Costing pt.1Outline of Current Lecture IV. Inventory Costing pt. 2V. Analysis of InventoryCurrent LectureChapter 6. ContinuedInventory CostingUsing cost flow methods consistently- Method should be used consistently, enhances comparability- Although consistency is preferred, a company may change its inventory costing methodLower of cost or market- When the value of inventory is lower than its costo Companies can “write down” the inventory to its market value in the period in which the price decline occurso Market value = replacement costo Example of conservatism- Illustration: assume that Ken Tuckie TV has the following lines of merchandise with costs and market values as indicatedCost Market Lower of cost or marketFlat-panel TVs $60,000 $55,000 $55,000Satellite radios$45,000 $52,000 $45,000DVD recorders $48,000 $45,000 $45,000DVDs $15,000 $14,000 $14,000Total Inventory $159,000Analysis of InventoryInventory management is a critical taskThese 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.- High inventory levels- storage costs, interest cost (on funds tied up in inventory), and costs associated with the obsolescence of technical goods or shifts in fashion- Low inventory levels- may lead to lost salesInventory Turnover Ratio- Inventory turnover ratio = cost of goods sold/ average inventory- Days in inventory = 365/ inventory turnover ratioAnalysts’ adjustments for LIFO reserve- Companies using LIFO are required to report the difference between inventory reported using LIFO and inventory using FIFO. This amount is referred to as the LIFO reserve- LIFO reserve = FIFO – LIFOInventory Errors- Common cause:o Failure to count or price inventory correctlyo Not properly recognizing the transfer of legal title to goods in transito Errors affect both the income statement and balance sheet COGS = exp = gross profit = I/S Inv = asset = B/SIncome statement effects- Inventory errors affect the computation of cost of goods sold and net income- Beg inv + COGpurchased – End inv = COGSBalance sheet effects- Effect of inventory errors on the balance sheet is determined by using the basic accounting equation:- Beg inv + COGpurchased – end inv = COGSEnding Inv Error Assets Liabilities SEOverstated Over - overUnderstated under - underReview Question:Understating ending inventory will overstate:a. Assetsb. Cost of goods soldc. Net incomed. Owner’s