A cost-flow example Suppose there are 10 items in beginning 成本流程实例假设有10个项目的开始.ppt

Inventory Cost Flow Assumptions FIFO (first in, first out) the way the grocer wants to sell milk Cost of Merchandise Sold consists of “old” costs Ending Inventory consists of the most “current” costs LIFO (last in, first out) started in the coal industry (last coal into the coal bin is the first coal out of the coal bin) Cost of Merchandise Sold consists of the most “current” costs Ending Inventory consists of “old” costs Average Costing Cost of Merchandise Sold consists of “average” costs Ending Inventory consists of “average” costs A cost-flow example: Suppose there are 10 items in beginning inventory costing $10 each. On the first day of the next accounting period, 20 identical items of inventory were purchased for $12 each. 25 item were sold during the period. What is the Cost of Merchandise Sold? What is the value of Ending Inventory? FIFO: Sold: 10 @ $10 + 15 @ $12 --$280 Ending Inventory: 5 @ $12 -- $60 LIFO: Sold: 20 @ $12 + 5 @ $10 -- $290 Ending Inventory: 5 @ 10 -- $50 Average Costing: Average Cost = (10 @ $10 + 20 @ 12)/ 30 = $11.33 Sold: 25 @ $11.33 --$283 + Ending Inventory: 5 @ $11.33 --$ 57 (approx) Abandon the historical cost principle when the future revenue-producing ability of the asset is no longer as great as its original cost. Use the Lower of Cost or Market (LCM) Rule. Why use LCM? Conservatism -- never overstate the value of an asset Representational Faithfulness -- Cost of Goods Sold should report what it purports to represent Relevance vs. Reliability Trade-off -- although the “cost” figure is reliable (the purchase invoices demonstrate its cost), its value -- if inventory has lost value -- is not relevant for decision-making Apply LCM ... a) to individual items of inventory, b) to categories of inventory, or c) to inventory overall (in aggregate) Financial Analysis Interpretation of Inventory Inventory Turnover = Cost of Goods Sold Inventory Faster (higher) turn is better Days Sales i