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Intermediate accounting 17e by kieso ch08

Intermediate Accounting
Seventeenth Edition

Kieso ● Weygandt ● Warfield

Chapter 8

Valuation of Inventories:
A Cost-Basis
Approach
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Learning Objectives
After studying this chapter, you should be able to:

1.

Identify inventory classifications and different inventory systems.

2.


Determine the goods and costs included in inventory.

3.

Describe and compare the cost flow assumptions used to account for inventories.

4.

Identify special issues related to LIFO.

5.

Determine the effects of inventory errors on the financial statements.

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Preview of Chapter 8
Valuation of Inventories: A Cost-Basis Approach
Inventory Issues



Classification



Cost flow



Control



Cost of goods sold

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3


Preview of Chapter 8
Goods and Costs Included in Inventory



Goods included



Costs included

Cost Flow Assumptions



Specific identification



Average-cost



FIFO



LIFO

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Preview of Chapter 8
L I F O: Special Issues



L I F O reserve



L I F O liquidation



Dollar-value L I F O



Comparison of L I F O approaches



Advantages and disadvantages



Basis for selection

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Preview of Chapter 8
Effect of Inventory Errors



Ending inventory misstated



Purchases and inventory misstated

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Learning Objective 1:
Identify Inventory Classifications and Different Inventory Systems

LO 1

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Inventory Issues
Classification
Inventories are asset:



items held for sale in ordinary course of business, or



goods to be used in production of goods to be sold

Businesses with Inventory

Merchandiser

LO 1

or

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Manufacturer

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Inventory Issues
Merchandising Company
Classification



One inventory account



Purchase merchandise in a
form ready for sale

LO 1

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Inventory Issues
Manufacturing Company
Three accounts

LO 1



Raw Materials



Work in Process



Finished Goods

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Flow of Costs

LO 1

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Inventory Cost Flow

LO 1

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Inventory Cost Flow
Perpetual System

1.

Purchases of merchandise are debited to Inventory.

2.

Freight-in is debited to Inventory. Purchase returns and allowances and purchase discounts
are credited to Inventory.

LO 1

3.

Cost of goods sold is debited and Inventory is credited for each sale.

4.

Subsidiary records show quantity and cost of each type of inventory on hand.

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Inventory Cost Flow
Periodic System

1.

Purchases of merchandise are debited to Purchases.

2.

Ending Inventory determined by physical count.

3.

Calculation of Cost of Goods Sold:
Beginning inventory

$ 100,000

Purchases, net

+ 800,000

Goods available for sale

LO 1

900,000

Ending inventory

−125,000

Cost of goods sold

$775,000

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Inventory Cost Flow
Comparing Perpetual and Periodic System
Illustration: Fesmire Company had the following transactions during the current year.

Beginning inventory

100 units at $6 = $600

Purchases

900 units at $6 = $5,400

Sales

600 units at $12 = $7,200

Ending inventory

400 units at $6 = $2,400

Record these transactions using the Perpetual and Periodic systems.

LO 1

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Comparative Entries

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Inventory Cost Flow
Illustration
Assume that at the end of the reporting period, the perpetual inventory account reported an inventory
balance of $4,000. However, a physical count indicates inventory of $3,800 is actually on hand. The entry to
record the necessary write-down is as follows.

Inventory Over and Short

200

Inventory

200

Note: Inventory Over and Short adjusts Cost of Goods Sold.

LO 1

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Inventory Control
All companies need periodic verification of the inventory records



By actual count, weight, or measurement



With counts compared with detailed inventory records

Companies should take the physical inventory

LO 1



Near the end of their fiscal year,



To properly report inventory quantities in their annual accounting reports

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Determining Cost of Goods Sold
Companies must allocate the cost of all the goods available for sale (or use) between the goods that
were sold or used and those that are still on hand.

Beginning inventory, Jan. 1

$ 100,000

Cost of goods acquired or produced during the year

800,000

Total cost of goods available for sale

900,000

Ending inventory, Dec. 31

200,000

Cost of goods sold during the year

LO 1

$700,000

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Learning Objective 2
Determine the Goods and Costs Included in Inventory

LO 2

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Goods and Costs Included in Inventory
Goods Included in Inventory
A company recognizes inventory and accounts payable at the time it controls the asset.
Passage of title is often used to determine control because the rights and obligations are established
legally.

LO 2

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Goods Included in Inventory
Goods in Transit

LO 2

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Goods Included in Inventory
Consigned Goods

LO 2



Goods out on consignment remain the property of the consignor



Consignee makes no entry to the inventory account for goods received

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Goods Included in Inventory
Special Sales Agreements
Sales with Repurchase Agreement



Often referred to as a repurchase (or product financing) agreement, usually involves a
transfer (sale) with either an implicit or explicit repurchase agreement.



LO 2

These arrangements are often described in practice as “parking transactions.”

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Special Sales Agreements
Sales with High Rates of Return
Seller

1.

Record sales revenue at the amount it expects to receive from the transaction.

2.

Establishes an estimated inventory return account at the date of sale to recognize that
some of its inventory will be returned.

LO 2

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