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Sung Cho Christy Grunebach Abby Schweickart Nate Slany.

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Presentation on theme: "Sung Cho Christy Grunebach Abby Schweickart Nate Slany."— Presentation transcript:

1 Sung Cho Christy Grunebach Abby Schweickart Nate Slany

2 Inventories are asset items that a company holds for sale in the ordinary course of business, or goods that it will use or consume in the production of goods to be sold.

3 Merchandise Inventory Raw Materials Inventory Work In Process Inventory Finished Goods Inventory Merchandising Company Wal-Mart Balance Sheet 31-Jan-04 Current assets (in millions) Cash and cash equivalents $ 5,199 Receivables 1,254 Inventories 26,612 Prepaid expenses and other 1,356 Total current assets $ 34,421 Manufacturing Company Caterpillar Balance Sheet 31-Dec-04 Current assets (in millions) Cash $ 445 Accounts Receivable 13,969 Inventories Raw materials $ 1,592 Work in process 664 Finished goods 2,209 Supplies 210 Total inventories 4,675 Other current assets 1,767 Total current assets $ 20,856

4 The physical goods to include inventory The costs to include in inventory The cost flow assumption to adopt

5 Goods in Transit Consigned Goods Special Sales Agreements

6 Product Costs- Those costs that attach to the inventory. Period Costs- The costs that are indirectly related to the acquisition or production of the goods. Treatment of Purchase Discounts

7 Specific Identification- Identifying each item sold and each item in inventory. Average Cost-Prices items in the inventory on the basis of the average cost of all similar goods available during the period. FIFO (First in, First out) LIFO (Last in, First out) The cost flow used goes under the Significant Accounting Policies on the disclosures

8 Amends ARB No. 43 chapter 4 Inventory Pricing..under some circumstances items such as idle facility expense, excessive spoilage, double freight and rehandling costs may be so abnormal as to require treatment as current period charges...

9 Changes Made to ARB No. 43: 1. Those items must be recognized as current period charges regardless of whether they meet the criterion of so abnormal 2. Allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities

10 Variable overhead costs of production are allocated on the basis of actual use Fixed overhead costs of production are allocated on the basis of normal capacity Normal Capacity: Production expected to be achieved over a period Unallocated overheads are recognized as an expense in the period in which they are incurred

11 16. Current cost amounts of inventory and property, plant, and equipment are measured as follows: a. Inventory at current cost or lower recoverable amount at the measurement date

12 The current cost of inventory is the current cost to purchase the inventory or the current cost of the materials required to produce the good (including some overhead expenses that are allowed under GAAP).

13 a. Indexation (1) Externally generated price indexes for the class of goods or services being measured (2) Internally generated price indexes for the class of goods or services being measured b. Direct pricing (1) Current invoice prices (2) Vendors price lists or other quotations or estimates (3) Standard manufacturing costs that reflect current costs.

14 Historical cost Property, plant, and equipment and most inventories are reported at their historical cost, which is the amount of cash or its equivalent, paid to acquire an asset, commonly adjusted after acquisition for amortization or other allocations. Current cost Some inventories are reported at their current cost, which is the amount of cash, or its equivalent, that would have to be paid if the same of an equivalent asset were acquired currently.

15 The increase or decrease in the current cost amount of inventory represents the difference between the measures of the assets ate their entry dates for the year and the measures of the assets at their exit dates for the year (FAS 89 ¶34).

16 For the current year The changes in current cost amount of inventory is reported both before and after eliminating the effects of general inflation. In the five-year summary Increase or decrease in the current cost and net of inflation for each of the five most recent years.

17 December 31, 19x5 1,000,000 units, $58,000,000 of historical cost Current cost is $58/unit December 31, 19x6 900,000 units, $65,700,000 of historical cost Current cost is $73/unit 3,036,000 units produced 3,136,000 units sold Consumer Price Index for All urban Consumers December 19x5 : Average 19x6 : December 19x6 : 303.5

18 Current Cost of Inventory and Cost of Goods Sold (for 19x6) Current cost at the beginning of year$58/unit Current cost at the end of year73/unit $131/unit Average current cost ($131/2)$65.5/unit Units sold during the year X 3,136 Average current cost goods sold$205, 408


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