Bài giảng Kế toán quốc tế: Chương 5

International Financial Accounting

Chapter 5: Merchandise Inventory

Learning Objectives  Define accounting principles related to inventory  Define inventory costing methods  Account for perpetual inventory using the three

most common costing methods

 Compare the effects of the three most common

Chapter 5: Merchandise Inventory

inventory costing methods

 Apply the lower-of-cost-or-market rule to

MA. Nguyen Quoc Nhat

inventory

 Measure the effects of inventory errors  Estimate ending inventory by the gross profit

method

 Consistency Principle  Disclosure Principle  Materiality Concept  Accounting Conservatism

5.1 Accounting Principles and Inventories 5.1 Accounting Principles and Inventories

 Consistency Principle Businesses should use the same accounting methods from period to period. Consistency helps investors compare a company’s financial statements from one period to the next.

 Materiality Concept A company must perform strictly proper accounting only for significant items. Information is significant—or, in accounting terms, material—when it would cause someone to change a decision.

5.1 Accounting Principles and Inventories 5.1 Accounting Principles and Inventories

 Disclosure Principle Company should report enough information for outsiders to make wise decisions about the company. In short, the company should report relevant, reliable, and comparable information about itself. All major accounting decisions are described in the footnotes to the financial statements

MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com

International Financial Accounting

Chapter 5: Merchandise Inventory

 Ending inventory = Number of units on

5.1 Accounting Principles and Inventories 5.2 Inventory Costing Methods

 Accounting Conservatism means exercising caution in reporting items in the financial statements.

 Cost of goods sold = Number of units

hand x Unit cost

 Cost per unit = Purchase price –

sold x Unit cost

Purchase discounts – Purchase returns + Freight in

5.2 Inventory Costing Methods 5.2 Inventory Costing Methods

GAAP allows are as follows 1. Specific unit cost 2. First-in, first-out (FIFO) cost 3. Last-in, first-out (LIFO) cost 4. Average cost

1. Specific unit cost The company knows exactly which item was sold and exactly what the item cost.  Suitable for businesses that sell unique, easily identified inventory items, such as automobiles (identified by the vehicle identification number [VIN]), jewels (a specific diamond ring), and real estate (identified by address)

5.2 Inventory Costing Methods

2. First-in, first-out (FIFO) cost  The cost of goods sold is based on the

FIFO method assumes earliest goods purchased are the first to be sold

 Often reflects the actual physical flow of

oldest purchases.

 Under FIFO, companies sell their oldest

merchandise.

MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com

inventory first.

International Financial Accounting

Chapter 5: Merchandise Inventory

5.2 Inventory Costing Methods

LIFO method assumes latest goods purchased are the first to be sold

3. Last-in, first-out (LIFO) cost  The cost of goods sold is based on the

 Under the LIFO method, companies sell

most recent purchases (new costs)

their newest inventory first.

Allocation of the cost of goods available for sale in average cost method is made on the basis of the weighted average unit cost

MA. Nguyen Quoc Nhat

5.2 Inventory Costing Methods

4. Average cost The business computes a new average cost per unit after each purchase. Ending inventory and cost of goods sold are then based on the same average cost per unit. An average price is calculated and applied to all goods

5.2 Inventory Costing Methods

Average cost method assumes that goods available for sale are homogeneous

MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com

International Financial Accounting

Chapter 5: Merchandise Inventory

First-In, First-Out (FIFO) Method

5.3 Inventory Accounting in a Perpetual System 5.3 Inventory Accounting in a Perpetual System

 Jul 15 Accounts receivable (4 $80) 320

Journal Entries Under FIFO  Jul 5 Inventory (6 x$45) 270 Accounts payable 270 Purchased inventory on account

 Jul 15 Cost of goods sold 170

Sales revenue 320 Sale on account

Inventory 170 Cost of goods sold.

5.3 Inventory Accounting in a Perpetual System

Last-In, First-Out (LIFO) Method

Journal Entries Under FIFO  July 26 Inventory (9 x$47) 423 Accounts payable 423

Purchased inventory on account.  Jul 31 Accounts receivable 800 800

Sales revenue Sale on account.  Jul 31 Cost of goods sold 462 Inventory 462 Cost of goods sold.

5.3 Inventory Accounting in a Perpetual System 5.3 Inventory Accounting in a Perpetual System

 Jul 15 Accounts receivable (4 $80) 320

 Jul 15 Cost of goods sold 180

MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com

Journal Entries Under LIFO  Jul 5 Inventory (6 x$45) 270 Journal Entries Under LIFO  July 26 Inventory (9 x$47) 423 Accounts payable 270 Accounts payable 423 Purchased inventory on account Purchased inventory on account.  Jul 31 Accounts receivable 800 Sales revenue 320 800 Sale on account Sales revenue Sale on account.  Jul 31 Cost of goods sold 468 Inventory 180 Inventory 468 Cost of goods sold. Cost of goods sold.

International Financial Accounting

Chapter 5: Merchandise Inventory

5.3 Inventory Accounting in a Perpetual System

5.3 Inventory Accounting in a Perpetual System Average-Cost Method

 Jul 15 Accounts receivable (4 $80) 320

Journal Entries Under AVCO  Jul 5 Inventory (6 x$45) 270 Accounts payable 270 Purchased inventory on account

 Jul 15 Cost of goods sold 175

Sales revenue 320 Sale on account

Inventory 175 . Cost of goods sold.

5.3 Comparing FIFO, LIFO, and Average Cost

5.3 Inventory Accounting in a Perpetual System

Journal Entries Under AVCO  July 26 Inventory (9 x$47) 423 Accounts payable 423

Purchased inventory on account.  Jul 31 Accounts receivable 800 800

Sales revenue Sale on account.  Jul 31 Cost of goods sold 460 Inventory 460 Cost of goods sold.

5.3 Comparing FIFO, LIFO, and Average Cost 5.3 Comparing FIFO, LIFO, and Average Cost

Fossil specializes in designer watches and leather goods. Assume Fossil began June holding 10 wristwatches that cost $50 each. During June, Fossil bought and sold inventory as follows: Jun 3 Sold 8 units for $100 each 16 Purchased 10 units @ $56 each 23 Sold 8 units for $100 each

MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com

Requirements 1. Prepare a perpetual inventory record for Fossil using FIFO, LIFO, and Average cost. 2. Journalize all of Fossil ’s inventory transactions for June under all three costing methods. 3. Show the computation of gross profit for each method. 4. Which method maximizes net income? Which method minimizes income taxes?

International Financial Accounting

Chapter 5: Merchandise Inventory

5.3 Comparing FIFO, LIFO, and Average Cost 5.3 Comparing FIFO, LIFO, and Average Cost

. .

5.3 Comparing FIFO, LIFO, and Average Cost

5.3 Comparing - Example

5.3 Comparing FIFO, LIFO, and Average Cost

Date

Quantity Purchased

Cost of goods Sold

Quantity Unit cost

Quantity

Total cost

Unit cost

Total cost

Jul -1

1) Prepare a perpetual inventory record for Fossil using FIFO, LIFO, and

Average cost.

2) Journalize all of Fossil’s inventory transactions for June under all three costing

methods.

3) Show the computation of gross profit for each method. 4) 4. Which method maximizes net income? Which method minimizes income

taxes? www.themegallery.com

Company Logo

MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com

International Financial Accounting

Chapter 5: Merchandise Inventory

5.4 Lower-of cost-or-market rule

Lower of cost or market rule (LCM). LCM shows accounting conservatism in action and requires that inventory be reported in the financial statements at whichever is lower: ● the historical cost of the inventory, or ● the market value of the inventory.

5.4 Lower-of cost-or-market rule

Suppose Smart Touch paid $3,000 for its CD01 inventory. By July 31, the inventory can now be replaced for $2,200, and the decline in value appears permanent.

Market is defined as replacement cost or net realizable value. + If the replacement cost of inventory is less than its historical cost, the business must adjust the inventory value. + If the inventory market is greater than cost, then we don’t adjust the inventory account because of the conservatism principle.

5.3 Estimating Ending Inventory 5.3 Estimating Ending Inventory

MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com

. .

International Financial Accounting