# Inventory Cost Flow Assumptions  During March, Jeremy’s Friendly Market showed the following results:  Beginning inventory of Big Q Beans was 400 cans.

## Presentation on theme: "Inventory Cost Flow Assumptions  During March, Jeremy’s Friendly Market showed the following results:  Beginning inventory of Big Q Beans was 400 cans."— Presentation transcript:

Inventory Cost Flow Assumptions  During March, Jeremy’s Friendly Market showed the following results:  Beginning inventory of Big Q Beans was 400 cans at \$0.75 per can  Purchased 1,000 cans of Big Q Beans for \$0.79 per can. Later that month, they purchased 2,000 more cans of Big Q Beans for \$0.84 per can  It sells 2,400 cans of beans during March  What is the cost of the beans sold?  What is the cost of the beans remaining in merchandise inventory?  Cost flow assumptions allocate goods available for sale (GAS) to cost of goods sold and ending inventory (EI)  BI + Purch = GAS  GAS – EI + GoGS (GAS = EI + GoGS)

 Alternate inventory cost flow assumptions  Specific identification Specific identification  tracks the actual cost of each item in merchandise inventory and the actual cost of items sold  Weighted average Weighted average  Same cost is assigned to all GAS for each inventory item carried by the business.  Average cost per unit in GAS: Total cost of inventory item _ Total # of units of inventory item  First-in, first-out (FIFO) First-in, first-out (FIFO)  Assumes that FIRST items purchased are first items sold  Oldest costs are in CoGS  Most recent costs are in EI  Last-in, last-out (LIFO) Last-in, last-out (LIFO)  Assumes that LAST items purchased are first items sold  Most recent costs are in CoGS  Oldest costs are in EI

Effect of Cost Flow Assumptions on Financial Statements FIFO LIFO Wt. Avg. Sales\$ 3,000 \$ 3,000\$3,000 Cost of G. S. 1,930 1,996 1,955 Gross Margin 1,070 1,004 1,045 Oper. exp. 250 250 250 Pretax Inc. 820 754 795 Taxes (30%) 246 226 239 Net Income \$574 \$528 \$556 Assumes sales price \$1.25/can & op exp \$250

Effect of Cost Flow Assumptions on Financial Statements  Effect of reported inventory and CoGS under different cost flow assumptions Effect of reported inventory and CoGS under different cost flow assumptions  GAS = CoGS + EI  Income tax effects under LIFO and FIFO Income tax effects under LIFO and FIFO  Sales revenue and operating expenses - same  Choosing an inventory cost flow method Choosing an inventory cost flow method  Similar companies  Maximize tax savings and cash flows  Maximize net income  If LIFO is used for tax purposes, it must also be used for financial statement purposes

 Lower-of-cost-or-market Rule  If market value is lower than cost  Reduce the inventory account  Reduce net income  Inventory turnover  Measures how quickly a firm is selling its inventory Cost of goods sold Average inventory  Average inventory = (BI + EI) / 2  Average days in inventory  365 (days in year) / Inventory turnover

Business Risk, Control, and Ethics  Inventory padding  Safeguarding assets  Physical controls  Includes ensuring that products don’t spoil  RFID tags  Controlling inventory levels and monitoring product developments to prevent inventory obsolescence

ASSIGN 11 - pg. 304-305, E6-2A, E6-3A, E6-8A ASSIGN 12 - pg. 309-312, P6-1A, P6-7A

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