ACCT 200 Lecture 9 Outline of Last Lecture II Classifying and Determining Inventory III Inventory Costing pt 1 Outline of Current Lecture IV Inventory Costing pt 2 V Analysis of Inventory Current Lecture Chapter 6 Continued Inventory Costing Using cost flow methods consistently Method should be used consistently enhances comparability Although consistency is preferred a company may change its inventory costing method Lower of cost or market When the value of inventory is lower than its cost o Companies can write down the inventory to its market value in the period in which the price decline occurs o Market value replacement cost o Example of conservatism Illustration assume that Ken Tuckie TV has the following lines of merchandise with costs and market values as indicated Cost Market Lower of cost or market Flat panel TVs 60 000 55 000 55 000 Satellite radios 45 000 52 000 45 000 DVD recorders 48 000 45 000 45 000 DVDs 15 000 14 000 14 000 Total Inventory 159 000 Analysis of Inventory Inventory management is a critical task 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 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 sales Inventory Turnover Ratio Inventory turnover ratio cost of goods sold average inventory Days in inventory 365 inventory turnover ratio Analysts 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 LIFO Inventory Errors Common cause o Failure to count or price inventory correctly o Not properly recognizing the transfer of legal title to goods in transit o Errors affect both the income statement and balance sheet COGS exp gross profit I S Inv asset B S Income statement effects Inventory errors affect the computation of cost of goods sold and net income Beg inv COGpurchased End inv COGS Balance sheet effects Effect of inventory errors on the balance sheet is determined by using the basic accounting equation Beg inv COGpurchased end inv COGS Ending Inv Error Overstated Understated Assets Over under Review Question Understating ending inventory will overstate a Assets b Cost of goods sold c Net income d Owner s equity Liabilities SE over under