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Financial Accounting I
1. Discuss the importance of inventory
valuation.
2. Study perpetual and periodic inventory
Inventories: Measurement systems and the ending period
adjustments for inventory.
3. Study and compare the inventory cost
flow assumptions.
4. Explain the effect of LIFO liquidations.
Inventories: Measurement 2
Perpetual Systems – Cost of Goods Sold and Perpetual Systems – Cost of Goods Sold
the Ending Inventory and the Ending Inventory (contd.)
Since the inventory and the cost of Physical inventory count is still needed
goods sold (CGS) accounts are at the end of a period to determine
updated with all purchases and sales whether inventory loss occurred.
transactions, the balances of these two
accounts are known at all time. A write down is required in the case of
inventory loss.
The CGS is determined by selecting a
cost flow assumption.
CGS = Beg. Inv. + Net Pur. – End. Inv. The difference in the inventory between
the inventory method used for internal
(i.e., FIFO) vs. external (i.e., LIFO)
Impact => -1000 -3000 reporting purposes is referred to as LIFO
Reserve or the Allowance to Reduce
of LIFO Inventory to LIFO .
Thus, the CGS of x 2 should be
increased by $2,000 when adopting The change in the balance of LIFO
LIFO rather than FIFO. Reserve from one period to another is
referred as the LIFO Effect , an impact
The income before tax would be on income.
decreased by $2,000.
Inventories: Measurement 51 Inventories: Measurement 52
LIFO Reserve – An Example LIFO Reserve – Example (contd.)
Assume that Acme Boot Company uses FIFO (Inventory Disclosure, note D)12/31/x6 12/31/x5
method for internal reporting purposes and a
LIFO for external reporting purposes.
Inventory at FIFO $360,000 $320,000
On 12/31/x5, the LIFO Reserve balance is
$20,000 and the value of ending inventory on LIFO Reserve (50,000) (20,000)
12/31/x6 under LIFO is $50,000 less than that Inventory at LIFO $310,000 $300,000
of FIFO.
Inventory on 12/31/x5 at FIFO = $320,000
Thus, $30,000 should be added to the
Inventory on 12/31/x6 at FIFO =$360,000 LIFO Reserve account. The LIFO effect
(i.e., the impact on income) for 20x6 is
Inventories: Measurement 53
$30,000. Inventories: Measurement 54