340aclass26



340aclass26

April 24, 2002

for next class:

EXAM 3

today:

evaluations

DVLIFO - some more ideas

retail inventory method - Doug's

extra credit questions due today

DVLIFO: Remember that this is not that different from the LIFO we looked at before. It still forces the balance sheet to include older costs (in our example, some portion of the $9000 layer from 1997 will stay as part of ending inventory for as long as inventory does not go to $0). This is still in contrast to FIFO, which forces the balance sheet to include the most current dollars (in our example, Gert's FIFO ending inventory was always in current year dollars).

>What do the indexes do for us? We use the indexes to put the FIFO inventory (which is in current year dollars) back to base year dollars (in our example, we were always going back to 1997 dollars). The index is the mechanism we need to convert a current dollar FIFO inventory into a older dollar DVLIFO inventory.

NEW TOPIC: Retail method of determining cost of inventory

This method is supposedly easier for retailers to use - why?

The Retail Method in 3 steps

STEP 1: Determine the goods available for sale in terms of cost and in retail dollars and ending inventory at retail.

STEP 2: Calculate the cost-to-retail ratio for the goods available for sale

STEP 3: Multiply Step 3 amount by the Cost-to-retail ratio to get the Ending Inventory at Cost.

Where does the retail dollar amount come from? Is it the original sales price? the average sales price? the final sales price? The retail dollar amount of the inventory is calculated using the final sales price so you have to keep track of the markdowns and mark-ups.

Example: Doug's Discount Store in-class

EXAM 3 REVIEW:

First, here are some check figures for FIFO and AVG Cost for the Allicorp inventory information.

FIFO periodic and perpetual (they are the same!)

Year 1 ending inventory: 350 @ $8 = $2,800; COGS = $4,900-$2,800 = $2,100

Year 2 ending inventory: 150 @ $12 = $1,800: COGS = $2,800 + $4,400 - $1,800 = $5,400

Year 3 ending inventory: 50 @ $15 = $750: COGS = $1,800 + $1,500 - $750 = $2,550

Average periodic (don't worry about avg perpetual)

Year 1 ending inventory: 350 @ $6.53 = $2,285.50 ; COGS = $4,900 - $2,285.50 = $2,614.50

Year 2 ending inventory: 150 @ $8.91 = $1,336.50: COGS = $2,285.50 + 4,400 - $1,336.5 = $5,349.50

Year 3 ending inventory: 50 @ $14.20 = $710: COGS = $1.336.5+$1,500 - $710 = $2,126.50

Exam 3 notes:

ALL ABOUT INVENTORY

OUR GOAL: To properly show Inventory on the balance sheet, valued according to GAAP

WHAT WE NEED: 1) The journal entries that get the information into our books

2) A method for determining the cost of the inventory

3) A method for determining the market value of the inventory

CHAPTER 9

What should I know?

Inventory categories - we didn't talk specifically about these in class but you should know these categories.

Items included in inventory - again, we didn't talk specifically about these in class but you had a homework problem (e9-1) on this. Questions 4&5 at the end of the chapter are also good reviews.

Components of inventory cost - pg 379 provides a good discussion of this (question 8 at the end of the chapter is good also)

Basic inventory accounting systems - what are the differences between a periodic and a perpetual inventory system? What accounts are used for each?

Basic inventory cost methods - FIFO, LIFO periodic, LIFO perpetual, AVG Cost, : the M&M example from class, homework e9-10, Allicorp in-class example (try working out the FIFO and AVG Cost ending inventories and COGS). Know the INVENTORY IDENTITY!

Financial Statement impacts of different basic methods - when does FIFO result in the highest income? LIFO? How will each method compare in terms of its impact on ratios (homework E9-22)?

Why would LIFO be preferred by stockholders? Why would FIFO be preferred by managers? If prices were generally falling rather than rising, how would these preferences change?

LIFO issues: Adoption of LIFO - how is it handled? ; LIFO liquidation - what does this mean? How does it usually affect net income? bonuses? taxes? (Homework problemP9-10)

LIFO shortcuts:

1) pooled LIFO: what is the concept? how can pools reduce the likelihood of LIFO liquidations?

2) Dollar Value LIFO method: Gert's in-class example, homework e9-19. Where do the numbers come from? Where does the index come from? What are the 5 steps to convert a FIFO ending inventory value to a DVLIFO ending inventory value? What would the journal entry look like?

CHAPTER 10

What should I know?

Lower-of-cost-or-market - How does this fit into our goal? Where does the market value come from? (Apr 22 class, homework e10-4, P10-3) How do we record any necessary adjustment?

Retail method of inventory - Doug's Discount Store, What are the 3 steps necessary to convert ending retail inventory to ending inventory at cost? Why is this method preferred by retailers? How do markups and markdowns affect the goods available for sale at retail? How do we make the method more conservative for LCM valuation?

Retail DV LIFO - Not on exam

Additional inventory issues (pages 454-458): NOT on exam 3

Inventory errors (page 458-460) - you should look at this, it is a great review for testing whether or not you understand the financial statement impact of the inventory process and the INVENTORY IDENTITY (homework problem p10-20)

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download

To fulfill the demand for quickly locating and searching documents.

It is intelligent file search solution for home and business.

Literature Lottery

Related searches