University of California, Santa Barbara WILEY IFRS EDITION Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Weygandt ● Kimmel ● Kieso PREVIEW OF CHAPTER 6 ***存貨性質依照公司所屬行業為依歸 Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso

6 Inventories LEARNING OBJECTIVES CHAPTER After studying this chapter, you should be able to: Discuss how to classify and determine inventory. Explain the accounting for inventories and apply the inventory cost flow methods. Explain the financial effects of the inventory cost flow assumptions. Explain the lower-of-cost-or-net realizable value basis of accounting for inventories. Indicate the effects of inventory errors on the financial statements. Discuss the presentation and analysis of inventory.

Classifying and Determining Inventory Learning Objective 1 Discuss how to classify and determine inventory. Classifying Inventory Merchandising Company Manufacturing Company One Classification: Inventory 存貨 Three Classifications: Raw Materials 原料 Work in Process 在製品 Finished Goods 製成品 • HELPFUL HINT Regardless of the classification, companies report all inventories under Current Assets on the statement of financial position. LO 1

ACCOUNTING ACROSS THE ORGANIZATION A Big Hiccup JIT can save a company a lot of money, but it isn’t without risk. An unexpected disruption in the supply chain can cost a company a lot of money. Japanese automakers experienced just such a disruption when a 6.8-magnitude earthquake caused major damage to the company that produces 50% of their piston rings. The rings themselves cost only $1.50, but you cannot make a car without them. No other supplier could quickly begin producing sufficient quantities of the rings to match the desired specifications. As a result, the automakers were forced to shut down production for a few days—a loss of tens of thousands of cars. Source: Amy Chozick, “A Key Strategy of Japan’s Car Makers Backfires,” Wall Street Journal (July 20, 2007). LO 1

Determining Inventory Quantities Physical Inventory taken for two reasons: Perpetual System 永續盤存 Check accuracy of inventory records. Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft. Periodic System 定期盤存 Determine the inventory on hand. Determine the cost of goods sold for the period. LO 1

Determining Inventory Quantities TAKING A PHYSICAL INVENTORY Involves counting, weighing, or measuring each kind of inventory on hand. Companies often “take inventory” (清點存貨) when the business is closed or business is slow. at the end of the accounting period. LO 1

ETHICS INSIGHT Falsifying Inventory to Boost Income Managers at a women’s apparel maker were convicted of falsifying inventory records to boost net income—and consequently to boost management bonuses. In another case, executives at an electronics manufacturer were accused of defrauding lenders by manipulating inventory records. The indictment said the company classified “defective goods as new or refurbished” and claimed that it owned certain shipments “from overseas suppliers” when, in fact, the company either did not own the shipments or the shipments did not exist. LO 1

Determining Inventory Quantities DETERMINING OWNERSHIP (所有權) OF GOODS GOODS IN TRANSIT 在途存貨 (存貨的一種) Purchased goods not yet received. Sold goods not yet delivered. Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale. LO 1

DETERMINING OWNERSHIP OF GOODS GOODS IN TRANSIT Illustration 6-2 Terms of sale Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ownership of the goods remains with the seller until the goods reach the buyer. LO 1

Determining Ownership of Goods Question Goods in transit should be included in the inventory of the buyer when the: public carrier accepts the goods from the seller. goods reach the buyer. terms of sale are FOB destination. terms of sale are FOB shipping point. Answer = A LO 1

Determining Ownership of Goods CONSIGNED GOODS 寄銷品 To hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods. Many car, boat, and antique dealers sell goods on consignment, why? LO 1

存貨管理 豐田生產方式(Toyota Production System, TPS)

存貨管理的概念 美國製造業平均的存貨成本為其價值的30%~35%. 成本來自於 : 折舊 保險 機會成本 … 試想,降低1,000萬美元的存貨可以可以節省的成本, 是為企業增加300萬美元的利潤.

存貨的定義(一) 存貨(Inventory) 存貨系統為一組政策與管理機制 就是在組織中所儲存的貨品或資源. 監控庫存量 決定存貨水準 何時需補充存貨 訂購數量

存貨的定義(二) 製造存貨 原物料 最終產品 零組件 消耗品 在製品 服務業的存貨 銷售的商品 提供服務所需的銷耗品

存貨分析的基本目的(決策) 何時配送 配送量 與供應商維持長期的夥伴關係 決定何時需訂購貨品 決定需訂購多少貨品

存貨的目的 維持作業的獨立 滿足產品需求的變化 保持生產排程的彈性 提供原材料送貨時間變化的安全保障 為了取得經濟訂購批量的好處 降低整備的次數 滿足產品需求的變化 維持安全或緩衝存貨 保持生產排程的彈性 可允許有較長的前置時間 提供原材料送貨時間變化的安全保障 原材料交貨的變異 為了取得經濟訂購批量的好處 節省訂購與運送成本

存貨成本 保有(或持有)成本 整備(或更換產品線)成本 訂購成本 短缺成本 應該降低高持有成本的存貨水準,並採取較頻繁地補貨政策 採取小批量進行生產,可降低存貨水準,進而降低成本(JIT) 訂購成本 訂購作業&時間及追蹤訂單的成本 短缺成本 訂單必須等候補貨或取消訂單

獨立與相依需求 獨立需求 相依需求 不同項目中,彼此的需求並無關聯 任何一個項目的需求,是直接來自於其他項目的需求 且通常為一個較高階項目的 外在因素推估需求,不是其他產品的一部份 獨立需求 不同項目中,彼此的需求並無關聯 相依需求 任何一個項目的需求,是直接來自於其他項目的需求 且通常為一個較高階項目的 汽車 引擎 車輪 板金 輪胎 輪圈 相依於汽車產量,而不是獨自產生的

存貨系統(一） 存貨系統為管理與控制產品的儲存,提供了一個組織與作業策略,此系統負責產品的訂購與驗收 : 系統亦必須追蹤 : 下單的時間 追蹤已訂購之貨品 訂購數量 應向誰訂購 系統亦必須追蹤 : 供應商是否已收到訂單 ? 是否已交運 ? 日期是否正確 ? 再訂購或退貨的程序是否已建立 ?

存貨系統(二） 單期存貨模式 多期存貨系統 採購數量含蓋了一段固定的時期,之後將不會在訂購該商品 客機的超額預訂 : 成本&補償 流行商品的訂單 : 訂單具季節性因素 一次訂單 : 一次性事件 多期存貨系統 必須定期採購某商品,並保有一定數量的存貨來滿足需求 固定訂購數量模式 固定時間模式

單期存貨模式 : 「送報童」案例 NORMSINV in Excel NORMSINV (0.8) = 0.84106 每週一銷售量 (統計) 90份 低於90份 50% 高於90份 須達到80%機率不缺貨 每份報紙售價(美元) 0.5 每份報紙成本(美元) 0.2 低估時邊際成本損失(美元) 0.3 NORMSINV (0.8) = 0.84106 0.841.5 X 10 = 8.4  9 份報紙 NORMSINV in Excel

固定訂購數量 vs. 固定時間(一) 特徵 固定訂購數量模式(Q) 固定時間模式(P) 訂購量 何時訂購 庫存記錄 庫存大小 維護時間 R-當在庫數量降到再訂購點時 T-當檢視時間到時 庫存記錄 每次數量減少或增加時 只在檢視時清點 庫存大小 少於固定時間模式 大於固定訂購數量模式 維護時間 持續庫存記錄,所以維護庫存較費時 項目種類 高價,關鍵或重要項目

固定訂購數量vs.固定時間(二)

固定訂購數量模式 固定訂購數量模式 存貨水準定義 基本假設 找出發出訂單的點Ｒ(實際存貨的一個特定數量) ，以及訂購數量Ｑ 庫存量＋訂貨量－欠撥量 基本假設 一段時間內，產品需求為固定且均勻分怖 從提出訂單至收貨的前置時間固定 產品單價固定 庫存貨持有成本是基於平均存貨成本 訂購或整備成本為固定 滿足所有產品的需求（不允許欠撥）

固定訂購數量模式

不同定購量下的年度產品成本 總成本 持有成本 商品年度成本 訂購成本 最小總成本訂購量

固定訂購數量模式方程式 年總成本 = + + 年購買 成本 年訂購 成本 年持有 成本 _ TC=年總成本 D = 年需求量 Q = 訂單量 S = 訂單處理成本 R = 再訂購點 L = 前置時間 H = 年平均單位持有成本 d = 平均日需求 年總成本 年購買 成本 年訂購 成本 年持有 成本 = + + _ 12

建立安全存量 定義： 目的： 方法－依據欲達成的服務水準而定： 預期需求量之外額外預備的存貨 日需求不定下，可以預防某種程度的缺貨 以幾週的需求為安全存量 機率方法 (當需求為Q時缺貨的機率，通常為常態分配)

建立安全存量

固定時間模式 在庫量 安全庫存 可能缺貨期間的平均需求 安全 存量 在庫量(含已訂購數量) 訂購量 = + -

固定時間模式 訂購量 + - = 可能缺貨期間的平均需求 安全 存量 在庫量(含已訂購數量) q = d (T + L) + Z s - I 盤點週期的天數 L = 前置時間的天數 d = 預估的平均日需求 z = 在特定服務水準下的標準差倍數 s = 盤點週期和前置時間下的需求標準差 T + L I = 目前庫存水準 (含已訂購數量)

愛情是無形資產，愛人是應付帳款 分手是結帳分錄，誤會是錯誤分錄 解釋是更正分錄，復合是回轉分錄 回憶是保留盈餘，思念則是日記簿 ~休息一下~ 愛情是無形資產，愛人是應付帳款  分手是結帳分錄，誤會是錯誤分錄  解釋是更正分錄，復合是回轉分錄  回憶是保留盈餘，思念則是日記簿 

ANATOMY OF A FRAUD Ted Nickerson, CEO of clock manufacturer Dally Industries, was feared by all of his employees. Ted also had expensive tastes. To support this habit, Ted took out large loans, which he collateralized with his ordinary shares of Dally Industries. If the price of Dally’s shares fell, he was required to provide the bank with more ordinary shares. To achieve target net income figures and thus maintain the share price, Ted coerced employees in the company to alter inventory figures. Inventory quantities were manipulated by changing the amounts on inventory control tags after the year-end physical inventory count. For example, if a tag said there were 20 units of a particular item, the tag was changed to 220. Similarly, the unit costs that were used to determine the value of ending inventory were increased from, for example, $125 per unit to $1,250. Both of these fraudulent changes had the effect of increasing the amount of reported ending inventory. This reduced cost of goods sold and increased net income. Total take: $245,000 The Missing Control Independent internal verification. The inventory records should have been spot-checked periodically, verifying that the number of units agreed with the amount on hand and that the unit costs agreed with vendor price sheets. LO 1

Inventory should be ¥195,000 (¥200,000 - ¥15,000 + ¥10,000). > DO IT! Deng Yaping Company completed its inventory count. It arrived at a total inventory value of ¥200,000. You have been given the information listed below. Discuss how this information affects the reported cost of inventory. 1. Deng Yaping included in the inventory goods held on consignment for Falls Co., costing ¥15,000. 2. The company did not include in the count purchased goods of ¥10,000, which were in transit (terms: FOB shipping point). 3. The company did not include in the count inventory that had been sold with a cost of ¥12,000, which was in transit (terms: FOB shipping point). Solution 1. Goods of ¥15,000 held on consignment should be deducted from the inventory count. 2. The goods of ¥10,000 purchased FOB shipping point should be added to the inventory count. 3. Item 3 was treated correctly. Inventory should be ¥195,000 (¥200,000 - ¥15,000 + ¥10,000). LO 1

Classifying and Determining Inventory Inventory is accounted for at cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Unit costs are applied to quantities to compute the total cost of the inventory and the cost of goods sold using the following costing methods: Specific identification 個別辨認法 First-in, first-out (FIFO) 先進先出法 Average-cost 平均成本法 Learning Objective 2 Explain the accounting for inventories and apply the inventory cost flow methods. Cost Flow Assumptions 成本流假設 LO 2

Inventory Costing Illustration: Crivitz TV Company purchases three identical 50-inch TVs on different dates at costs of £700, £750, and £800. During the year Crivitz sold two sets at £1,200 each. These facts are summarized below. Illustration 6-3 Data for inventory costing example LO 2

Specific Identification If Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is £1,500 (£700 + £800), and its ending inventory is £750. Illustration 6-4 Specific identification method LO 2

Specific Identification Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory. Practice is relatively rare. Most companies make assumptions (cost flow assumptions) about which units were sold. LO 2

Cost Flow Assumptions There are two assumed cost flow methods: First-in, first-out (FIFO) 先進先出 Average-cost 平均成本 Cost flow does not need be consistent with the physical movement of the goods. LO 2

Cost Flow Assumptions Data for Lin Electronics’ Astro condensers. Illustration 6-5 (Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold LO 2

Cost Flow Assumptions FIRST-IN, FIRST-OUT (FIFO) Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold. Often parallels actual physical flow of merchandise. Companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed. LO 2

FIRST-IN, FIRST-OUT (FIFO) Illustration 6-6 Allocation of costs—FIFO method LO 2

FIRST-IN, FIRST-OUT (FIFO) • HELPFUL HINT Another way of thinking about the calculation of FIFO ending inventory is the LISH assumption—last in still here. Illustration 6-6 Allocation of costs—FIFO method LO 2

Cost Flow Assumptions AVERAGE-COST Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred. Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory. Illustration 6-8 Formula for weighted-average unit cost LO 2

AVERAGE-COST LO 2 Illustration 6-9 Allocation of costs—average-cost method LO 2

AVERAGE-COST LO 2 Illustration 6-11 Illustration 6-9 Allocation of costs—average-cost method LO 2

> DO IT! The accounting records of Shumway Ag Implement show the following. Beginning inventory 4,000 units at £ 3 Purchases 6,000 units at £ 4 Sales 7,000 units at £12 Determine the cost of goods sold during the period under a periodic inventory system using (a) the FIFO method and (b) the average-cost method. Solution Cost of goods available for sale = (4,000 × £3) + (6,000 × £4) = £36,000 Ending inventory = 10,000 − 7,000 = 3,000 units (a) FIFO: £36,000 − (3,000 × £4) = £24,000 (b) Average cost per unit: [(4,000 × £3) + (6,000 × £4)] ÷ 10,000 = £3.60 Average-cost: £36,000 − (3,000 × £3.60) = £25,200 LO 2

練習一下~ E6-4

Financial Statement and Tax Effects of Cost Flow Methods Learning Objective 3 Explain the financial effects of the inventory cost flow assumptions. Either of the two cost flow assumptions is acceptable for use. For example, adidas (DEU) and Lenovo (CHN) use the average-cost method, whereas Syngenta Group (CHE) and Nokia (FIN) use FIFO. A recent survey of IFRS companies, approximately 60% use the average-cost method, 40% use FIFO, and 23% use both for different parts of their inventory. LO 3

INCOME STATEMENT EFFECTS Illustration 6-10 Comparative effects of cost flow methods LO 3

STATEMENT OF FINANCIAL POSITION EFFECTS A major advantage of the FIFO method is that in a period of inflation, the costs allocated to ending inventory will approximate their current cost. A major shortcoming of the average-cost method is that in a period of inflation, the costs allocated to ending inventory may be understated in terms of current cost. LO 3

A問：為什麼蛇會冬眠，而魯蛇不會呢? B答：因為魯蛇知道他沒有春天啊! A道：更! 這麼貼切叫本魯怎麼活?

TAX EFFECTS Both inventory and net income are higher when companies use FIFO in a period of inflation. Average-cost results in the lower income taxes (because of lower net income) during times of rising prices. LO 3

Using Cost Flow Methods Consistently Method should be used consistently, enhances comparability. Although consistency is preferred, a company may change its inventory costing method. LO 3

Cost Flow Assumptions Question In periods of rising prices, average-cost will produce: higher net income than FIFO. the same net income as FIFO. lower net income than FIFO. net income equal to the specific identification method. Answer = A LO 3

Cost Flow Assumptions Question Factors that affect the selection of an inventory costing method do not include: tax effects. statement of financial position effects. income statement effects. perpetual vs. periodic inventory system. Answer = B LO 3

GLOBAL INSIGHT Is LIFO Fair? ExxonMobil Corporation (USA), like many U.S. companies, uses a cost flow assumption called last-in, first-out (LIFO) to value its inventory for financial reporting and tax purposes. In one recent year, this resulted in a cost of goods sold figure that was $5.6 billion higher than under FIFO. By increasing cost of goods sold, ExxonMobil reduces net income, which reduces taxes. Critics say that LIFO provides an unfair “tax dodge.” As the U.S. Congress looks for more sources of tax revenue, some lawmakers favor the elimination of LIFO. Supporters of LIFO argue that the method is conceptually sound because it matches current costs with current revenues. In addition, they point out that this matching provides protection against inflation. International accounting standards do not allow the use of LIFO. As a result, the net income of foreign oil companies, such as BP (GBR) and Royal Dutch Shell (GBR and NLD), are not directly comparable to U.S. companies, which makes analysis difficult. Source: David Reilly, “Big Oil’s Accounting Methods Fuel Criticism,” Wall Street Journal (August 8, 2006), p. C1. LO 3

存貨跌價損失 ＜存貨＞規定 長期工程合約 生物性資產 金融商品

Lower-of-Cost-or-Net Realizable Value 成本與淨變現孰低法 Learning Objective 4 Explain the lower-of-cost-or-net realizable value basis of accounting for inventories. When the value of inventory is lower than its cost companies must “write down” (沖減) the inventory to its net realizable value. Net realizable value: Amount that a company expects to realize (receive from the sale of inventory). LO 4

Lower-of-Cost-or-Net Realizable Value 成本與淨變現孰低法

Lower-of-Cost-or-Net Realizable Value Illustration: Assume that Gao TV has the following lines of merchandise with costs and market values as indicated. Illustration 6-11 Computation of lower-of-cost-or-net realizable value LO 4

Inventory Errors Common Causes: Learning Objective 5 Indicate the effects of inventory errors on the financial statements. Common Causes: Failure to count or price inventory correctly. Not properly recognizing the transfer of legal title to goods in transit. Errors affect both the income statement (cost of goods sold) and statement of financial position (inventory). LO 5

Income Statement Effects (很重要!) Inventory errors affect the computation of cost of goods sold and net income in two periods. Illustration 6-12 Formula for cost of goods sold Illustration 6-13 Effects of inventory errors on current year’s income statement LO 5

Income Statement Effects Inventory errors affect the computation of cost of goods sold and net income in two periods. An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period. Over the two years, the total net income is correct because the errors offset each other. Ending inventory depends entirely on the accuracy of taking and costing the inventory. LO 5

Net income understated Income Statement Effects Illustration 6-14 Effects of inventory errors on two years’ income statements Combined income for 2-year period is correct. (€3,000) Net income understated €3,000 Net income overstated LO 5

Income Statement Effects Question Atlantis Company’s ending inventory is understated NT$122,000. The effects of this error on the current year’s cost of goods sold and net income, respectively, are: understated, overstated. overstated, understated. overstated, overstated. understated, understated. LO 5

Statement of Financial Position Effects Effect of inventory errors on the statement of financial position is determined by using the basic accounting equation: Assets = Liabilities + Equity. Errors in the ending inventory have the following effects. Illustration 6-15 Effects of ending inventory errors on statement of financial position LO 5

練習一下~ E6-10

> DO IT! LCNRV Basis; Inventory Errors (a) Tracy Company sells three different types of home heating stoves (wood, gas, and pellet). The cost and net realizable value of its inventory of stoves are as follows. Determine the value of the company’s inventory under the lower-of-cost-or-net realizable value approach. Total inventory value is the sum of these amounts, NT$430,000. LO 5

> DO IT! LCNRV Basis; Inventory Errors Visual Company overstated its 2016 ending inventory by NT$22,000. Determine the impact this error has on ending inventory, cost of goods sold, and equity in 2016 and 2017. 2016 2017 Ending inventory NT$22,000 overstated No effect Cost of goods sold NT$22,000 understated NT$22,000 overstated Equity NT$22,000 overstated No effect Ending inventory Cost of goods sold Equity LO 5

Statement Presentation and Analysis Learning Objective 6 Discuss the presentation and analysis of inventory. Presentation Statement of Financial Position - Inventory classified as current asset. Income Statement - Cost of goods sold is subtracted from sales. There also should be disclosure of the major inventory classifications, basis of accounting (cost or LCNRV), and costing method (specific identification, FIFO, or average-cost). LO 6

Statement Presentation and Analysis Inventory management is a double-edged sword High Inventory Levels - may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage). Low Inventory Levels – may lead to stock-outs and lost sales. LO 6

Analysis Inventory turnover 存貨周轉率 measures the number of times on average the inventory is sold during the period. Cost of Goods Sold Inventory Turnover = Average Inventory Days in inventory 存貨天數 measures the average number of days inventory is held. Days in Year (365) Days in Inventory = Inventory Turnover LO 6

Analysis Illustration: Esprit Holdings (HKG) reported in a recent annual report a beginning inventory of HK$3,209 million, an ending inventory of HK$3,254 million, and cost of goods sold for the year ended of HK$12,071 million. The inventory turnover formula and computation for Esprit Holdings are shown below. Illustration 6-17 Inventory turnover formula and computation for Esprit Holdings (in millions) Days in Inventory: Inventory turnover of 3.7 times divided into 365 is approximately 99 days. This is the approximate time that it takes a company to sell the inventory. LO 6

ACCOUNTING ACROSS THE ORGANIZATION Improving Inventory Control with RFID Many large retailers have improved their inventory control with the introduction of radio frequency identification (RFID). Much like bar codes, which tell a retailer the number of boxes of a specific product it has, RFID goes an additional step, helping to distinguish one box of a specific product from another. RFID uses technology similar to that used by keyless remotes that unlock car doors. Companies currently use RFID to track shipments from supplier to distribution center to store. Other potential uses include monitoring product expiration dates and acting quickly on product recalls. Many companies also anticipate faster returns and warranty processing using RFID. This technology will further assist managers in their efforts to ensure that their store has just the right type of inventory, in just the right amount, in just the right place. LO 6

> DO IT! Early in 2017, Seoul Company switched to a just-in-time inventory system. Its sales, cost of goods sold, and inventory amounts for 2016 and 2017 are shown below. 2016 2017 Sales revenue ₩2,000,000 ₩1,800,000 Cost of goods sold 1,000,000 910,000 Beginning inventory 290,000 210,000 Ending inventory 210,000 50,000 Determine the inventory turnover and days in inventory for 2016 and 2017. 2016 2017 LO 6

有一家公司在應徵，面試時，第一個進來的是一個數學系的，主管問他，一加一等於多少？那個人答說在某種數學意義下一加一會等於二，但某些時候又不然 有一家公司在應徵，面試時，第一個進來的是一個數學系的，主管問他，一加一等於多少？那個人答說在某種數學意義下一加一會等於二，但某些時候又不然... 再來第二個是一個經濟系的，問題一樣，回答則改成：在某種經濟體系下時，一加一會等於二，但某些時候..... 再來第三個進來，是一個會計系的，問題不變 只見這位會計系的學生站起來檢查一下門窗，並且把窗簾拉上，然後走進那位主管身旁，小小聲的問道...你要多少？

Perpetual Inventory System APPENDIX 6A Perpetual Inventory System Learning Objective 7 Apply the inventory cost flow methods to perpetual inventory records. Illustration 6A-1 Inventoriable units and costs Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO and average-cost. LO 7

First-In-First-Out (FIFO) Illustration 6A-2 Perpetual system—FIFO Cost of Goods Sold Ending Inventory LO 7

Average-Cost Cost of Goods Sold Ending Inventory LO 7 Illustration 6A-3 Perpetual system— average-cost method Cost of Goods Sold Ending Inventory LO 7

Estimating Inventories APPENDIX 6B Estimating Inventories Learning Objective 8 Describe the two methods of estimating inventories. Gross Profit Method 毛利法 Estimates the cost of ending inventory by applying a gross profit rate to net sales. Illustration 6B-1 Gross profit method formulas LO 8

Gross Profit Method Illustration: Kishwaukee Company’s records for January show net sales of $200,000, beginning inventory $40,000, and cost of goods purchased $120,000. The company expects to earn a 30% gross profit rate. Compute the estimated cost of the ending inventory at January 31 under the gross profit method. Illustration 6B-2 Example of gross profit method

Retail Inventory Method 零售價法 Company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost. 平均成本率 Illustration 6B-3 Retail inventory method formulas LO 8

Retail Inventory Method Illustration: Illustration 6B-4 Application of retail inventory method Note that it is not necessary to take a physical inventory to estimate the cost of goods on hand at any given time. LO 8

Last-In-First-Out (LIFO) APPENDIX 6C LIFO Inventory Method Learning Objective 9 Apply the LIFO inventory costing method. Last-In-First-Out (LIFO) Under IFRS, LIFO is not permitted for financial reporting purposes. Assumes latest goods purchased are first to be sold. Seldom coincides with actual physical flow of merchandise, except for goods stored in piles, such as coal or hay. LO 9

Last-In-First-Out (LIFO) Illustration 6C-1 Allocation of costs—LIFO method LO 9

Last-In-First-Out (LIFO) Illustration 6C-1 Allocation of costs—LIFO method Illustration 6C-2 Proof of COGS LO 9

A Look at U.S. GAAP Key Points Similarities Learning Objective 10 Compare the accounting for inventories under IFRS and U.S. GAAP. Key Points The requirements for accounting for and reporting inventories are more principles-based under IFRS. That is, GAAP provides more detailed guidelines in inventory accounting. IFRS requires companies to use the same cost flow assumption for all goods of a similar nature. GAAP has no specific requirement in this area. Similarities The definitions for inventory are essentially similar under GAAP and IFRS. Both define inventory as assets held-for- sale in the ordinary course of business, in the process of production for sale (work in process), or to be consumed in the production of goods or services (e.g., raw materials). Who owns the goods—goods in transit or consigned goods—as well as the costs to include in inventory, are accounted for the same under GAAP and IFRS. LO 10

A Look at U.S. GAAP Key Points Differences Both GAAP and IFRS permit specific identification where appropriate. IFRS actually requires that the specific identification method be used where the inventory items are not interchangeable (i.e., can be specifically identified). If the inventory items are not specifically identifiable, a cost flow assumption is used. GAAP does not specify situations in which specific identification must be used. A major difference between IFRS and GAAP relates to the LIFO cost flow assumption. GAAP permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO and average-cost are the only two acceptable cost flow assumptions permitted under IFRS. LO 10

A Look at U.S. GAAP Key Points Differences When testing to see if the value of inventory has fallen below its cost, IFRS defines market as net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to complete and sell. In other words, net realizable value is the best estimate of the net amounts that inventories are expected to realize. GAAP, on the other hand, defines market as essentially replacement cost. The GAAP method of inventory valuation is often referred to as the lower-of-cost-or-market (LCM). LO 10

A Look at U.S. GAAP Key Points Differences Under GAAP, if inventory is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost. As a result, the inventory may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous write-down. Both the write-down and any subsequent reversal should be reported on the income statement. IFRS generally requires pre-harvest inventories of agricultural products (e.g., growing crops and farm animals) to be reported at fair value less cost of disposal. GAAP generally requires these items to be recorded at cost. LO 10

A Look at U.S. GAAP Looking to the Future One convergence issue that will be difficult to resolve relates to the use of the LIFO cost flow assumption. As indicated, IFRS specifically prohibits its use. Conversely, the LIFO cost flow assumption is widely used in the United States because of its favorable tax advantages. In addition, many argue that LIFO from a financial reporting point of view provides a better matching of current costs against revenue and, therefore, enables companies to compute a more realistic income. LO 10

A Look at U.S. GAAP A Look at IFRS GAAP Self-Test Questions Which of the following should not be included in the inventory of a company using GAAP? Goods held on consignment from another company. Goods shipped on consignment to another company. Goods in transit from another company shipped FOB shipping point. None of the above. LO 10

A Look at U.S. GAAP A Look at IFRS GAAP Self-Test Questions Which method of inventory costing is prohibited under IFRS? Specific identification. FIFO. LIFO. Average-cost. LO 10

A Look at U.S. GAAP A Look at IFRS GAAP Self-Test Questions Specific identification: must be used under IFRS if the inventory items are not interchangeable. cannot be used under IFRS. cannot be used under GAAP. must be used under IFRS if it would result in the most conservative net income. LO 10

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