chapter 6B

Slide 1: 

Weighted-Average Cost The average cost method allocates the cost of goods available for sale on the basis of weighted-average unit cost incurred.

The average cost method allocates the cost of goods available for sale on the basis of weight-average unit cost incurred. : 

The average cost method allocates the cost of goods available for sale on the basis of weight-average unit cost incurred. Weighted Average

Slide 3: 

3 Factors Used in Selecting an Inventory Cost Method Income statement effects Balance sheet effects Tax effects

Slide 4: 

Balance Sheet Effects of Cost Flow Methods

Income Statement Effects : 

5 Income Statement Effects

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6 Income Statement Effects

Slide 7: 

7 Income Statement Effects

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8 Income Statement Effects

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9 Income Statement Effects

Income Statement Effects : 

10 Income Statement Effects In periods of increasing prices FIFO reports the highest net income LIFO the lowest average cost falls in the middle. In periods of decreasing prices FIFO will report the lowest net income LIFO the highest average cost in the middle.

Balance Sheet Effects : 

11 Balance Sheet Effects In a period of increasing prices, costs allocated to ending inventory using: FIFO will approximate current costs LIFO will be significantly understated

Why Do Companies Use LIFO? : 

12 Why Do Companies Use LIFO? During periods of rising prices, Higher cost of goods sold Lower net income

Income Tax Effects : 

13 Income Tax Effects

Consistency : 

14 Consistency Whatever cost flow method a company chooses, it must use it consistently… OR Disclose the change and its effects on net income in the financial statement.

Review : 

15 Review Which inventory cost flow method produces the highest net income in a period of rising prices? Weighted average cost Lifo Fifo Specific Identification.

Review : 

16 Review Which inventory cost flow method produces the highest net income in a period of rising prices? Weighted average cost Lifo Fifo Specific Identification.

Review : 

17 Which inventory cost flow method produces the lowest income taxes in a period of rising prices? Review Weighted average cost Lifo Fifo Specific Identification.

Review : 

18 Which inventory cost flow method produces the lowest income taxes in a period of rising prices? Review Weighted average cost Lifo Fifo Specific Identification.

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19 Using the above data, assume there are 9,000 units on hand at Dec. 31, what is the cost of ending inventory under FIFO? Review 5,000 Units @ $13 = $ 65,000 4,000 Units @$12 = $ 48,000 TOTAL $113,000

Review : 

20 Review Using the above data, assume there are 9,000 units on hand at Dec. 31, what is the cost of ending inventory under LIFO? 8,000 Units @ $11 = $ 88,000 1,000 Units @$12 = $ 12,000 TOTAL $100,000

Review : 

21 Review Using the above data, assume there are 9,000 units on hand at Dec. 31, what is the cost of ending inventory under Weighted-average costs? 309,000/26,000 = $11.88 9,000 units X $11.88 = $106.92 = 88,000 =156,000 = 65,000 309,000 26,000

Lower of Cost or Market Basis of Accounting for Inventories : 

22 Lower of Cost or Market Basis of Accounting for Inventories When the value of inventory is lower than its cost, the inventory is written down to its market value by valuing the inventory at the lower of cost or market (LCM) in the period in which the price decline occurs.

Lower of Cost or Market (LCM) : 

23 Lower of Cost or Market (LCM) Under LCM, market is defined as current replacement cost – NOT selling price Departure from cost principle, but follows conservatism concept LCM applied after costing with one of methods (FIFO, LIFO, average, specific) Apply to individual items or major categories or total inventory

Inventory Turnover Ratio = : 

24 Inventory Turnover Ratio = Cost of Goods Sold Average Inventory An indication of how quickly a company sells its goods. Higher is better.

Days in Inventory= : 

25 Days in Inventory= 365 days Inventory Turnover Ratio Measures average number of days inventory is held.

LIFO RESERVE : 

26 LIFO RESERVE Accounting standards require firms using LIFO to report the amount by which inventory would be increased (or on occasion decreased) if the firm had instead been using FIFO. This amount is referred to as the LIFO reserve. Reporting the LIFO reserve enables analysts to make adjustments to compare companies that use different cost flow methods.

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