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1、Inventory（存货）Inventory means a stock of goods that a firm owns and holds for sale(finished goods inventory成品存货)or for further processing(raw material inventory原始材料存货,and work-in-process inventory在加工存货).Manufacturing or retailing firms generate profits from selling out their inventories.What is impor
2、tant about accounting for inventory?A graphAll InventoryInventory SoldInventory Left in The WarehouseI/SRevenue.COGS.B/SAssetsCashA/RInventory?Inventory costing and earnings Wal-MartCOGS:$93,438 MIf reduce COGS by 2%of$1,869 MIncome before tax increases by$1,869 MNet Income:$3,526 MAt 35%tax rate,ne
3、t income increases by$1,215 MNet Income increase:1,215/3,526=34.4%How a firm acquire inventory?1.Manufacture:2.General Motor purchases steels(raw material inventory);workers process steels and manufacture cars(finished goods inventory).Before a car is finished,it is in work-in-process inventory.2.Pu
4、rchase:3.A car dealer purchases new cars from GM,put the cars in its inventory before selling them.How a manufacturing firm accumulates costs for its finished goods inventory?Our focus here is on purchased inventory.The accounting for manufactured inventory follows the same rules.In any given period
5、,the firm starts the period with some inventory(beginning inventory,BI),it then purchases more inventory during the period(new purchases),and sells some inventory(sales).The firm ends the year with some inventory(ending inventory,EI).The costs(the total amount of money used to purchase)of sold inven
6、tory is called cost of goods sold(COGS)Inventory equationIn terms of number of unitsBeginning inventory+new purchases sales=Ending inventoryIn terms of dollar amountsBeginning inventory+new purchases COGS=Ending inventoryFrom prior period Balance sheetTo current Period Income statementTo current Per
7、iod Balance sheetTiming of Computation of COGS Periodic Inventory SystemA purchaseDr.Inventory Cr.CashA saleDr.A/RCr.RevenueA saleDr.A/RCr.RevenueAt end of period:Dr.COGS Cr.InventoryHow to decide COGS and EI at end of period:1)count inventory in the Warehouse to get EI;2)BI+Purchase(known)EI(counte
8、d and costed)=Goods available for sales-EI=COGS BIEITiming of Computation of COGS-2Perpetual inventory systemBIEIA purchaseDr.Inventory Cr.CashA saleDr.A/R Cr.RevenueDr.COGS Cr.InventoryA saleDr.A/R Cr.RevenueDr.COGS Cr.InventoryHow to decide COGS and EI:1)add COGS in all sales journalEntries to get
9、 COGS;2)BI+Purchases(known)COGS=Goods available for sale COGS=EIComparisons of the two systemPeriodic systemPerpetual systemMake the COGS/Inventory journal entry once a yearMake the COGS/Inventory journal entry every time a sale is madeHave to physically count inventory at end of period to get EI,th
10、en compute COGSDoes not have to do physical count of inventory,get COGS directly and then compute EIAll shrinkage(theft,loss,etc.)goes into COGS.Can not tell whether a piece of inventory was actually sold or stolen.If EI is different from a physical count,the difference is due to theft and waste,the
11、n do:Dr.Loss from inventory shrinkage Cr.Inventory Good for large volume,low value goods,such as groceries.Good for small volume,high value goods,such as cars.Inventory costing methods(*from now on,we focus on periodic inventory system)The main difficulty in costing inventory is that the same produc
12、ts in inventory purchased at different time cost differently.BI:10 units$51st P:8 units$62nd P:15 units$73rd P:15 units$8Four Layers Of InventoryAt year-end,the firm Counted inventory and found16 units in EI,then firm assumed it sold 32 units of Inventory,how much should EI and COGS be?Remember:The
13、productsAre identicalAnd no priceTag on themInventory costing methods-Goods available for saleFrom BI:10 units*$5=$50From 1st purchase8 units*$6=$48From 2nd purchase15 units*$7=$105From 3rd purchase15 units*$8=$120Units available for sale:48 unitsGoods available for sales:$323Inventory costing metho
14、d:FIFO,first-in,first-outIn the example,first the BI is sold,10 unitsThen the 1st purchase is sold,8 unitsThen 14 units from the 2nd purchase are sold,14 unitsThen EI includes:1 unit from 2nd purchase1 unit*$7=$7And 15 units from 3rd purchase15 units*$8=$120Total EI:16 UnitsTotal EI in dollar:$7+120
15、=$127COGS=Goods available for sale-EI$323 127=$196Inventory costing method:LIFO,Last-in,first-outIn the example,first the 3rd purchase is sold,15 unitsThen the 2nd purchase is sold,15 unitsThen 2 units from the 1st purchase are sold,2 unitsThen EI includes:6 unit from 1st purchase6 unit*$6=$36And 10
16、 units from BI10 units*$5=$50Total EI:16 UnitsTotal EI in dollar:$36+50=$86COGS=Goods available for sale-EI$323 86=$237Inventory costing method:Weighted averageUnits available for sale:48 unitsGoods available for sales:$323Average cost per unit:$323/48=$6.7316 units in EIEI=$6.73*16=$107.68COGS=Good
17、s available for sale-EI$323 107.68=$215.32Comparisons of EI and COGS under the three methodsEI on B/SCOGS on I/SFIFO$127$196LIFO$86$237Weighted Average$107.68$215.32Which method you choose if you want to 1)have higherNet income,or 2)pay less tax?Inventory costing method:the impact on income statemen
18、tFIFOLIFORevenues(assumed)$250$250COGS 196 237Income before tax 54 13Income tax(35%)18.9 4.55Net Income 35.1 8.54Inventory costing method:discussion in a rising cost level environmentFIFOLIFOEI contains recently purchased inventory,so EI cost(high)is close to current market price for Inventory.EI co
19、ntains old inventory,so EI cost(low)is not representative of current market price for inventoryCOGS contains old,low-priced inventory,so low COGS,high Net Income,high income tax.COGS contains new,high-priced inventory,so high COGS,low Net Income,low income tax.What happens in a declining cost level
20、environment?Balance sheetWith currentdataIncome StatementWith old dataBalance sheetWith olddataIncome StatementWith current dataFIFO or LIFO,that is the question?Given that the general inventory price level has been increasing over the last century,why not all firms are using LIFO to save tax?Intern
21、al Revenue Service has a“LIFO confirmity rule”,a company using LIFO/FIFO for financial reporting purpose must also use the same method for tax reporting purpose.Therefore,a company must tradeoff between high income/high tax and low tax/low income.FIFO or LIFO,that is the question?LIFO has been allow
22、ed since 1939 in the U.S.,but the vast majority of companies continue to use FIFO.By an estimate,between 1973 and 1975,106 FIFO companies,relative to matched LIFO companies,each paid nearly$26 million in additional income tax.The money could have been used to expand business or return to shareholder
23、s.FIFO or LIFO,that is the question?Why companies stick with FIFO despite the cash flow advantage of LIFO?1)Management prefer high net income over low income tax(if their bonus is tied to net income,if they are to exercise their stock options,etc.)2)For some companies,LIFO and FIFO do not make much
24、difference(if price of inventory is stable,if inventory turns over very quickly,etc.)Earnings management through choice of inventory costing methodVery difficultCompanies can not switch between LIFO and FIFO at ease depending on the price level of inventoryOnce they choose one method,they have to st
25、ick to it.LIFO inventory layer dippingIn a rising inventory cost environment1)If EI quantity is lower than BI quantity,then we say the company dipped into old layers;2)Within a year,if units of inventory sold include units from early-of-the-year low-priced purchases,we also say the company dipped in
26、to old layers(our example)LIFO inventory layer dippingInventory dipping causes the firm to use older,lower-priced inventory in determining COGS,which leads to lower COGS,higher Net Income and higher tax than if the firm has been able to maintain the inventory level,against the spirit of LIFO method.
27、Earnings management through layer dipping LIFORevenues(assumed)$250COGS 237Income before tax 13Income tax(35%)4.55Net Income 8.54Now,whatHappens if theCompany does Not make the 3rd purchase?Inventory costing method:LIFO,Last-in,first-outFirst the 2nd purchase is sold,15 unitsThen the 1st purchase ar
28、e sold,8 unitsThen 9 units from the BI are sold9 unitsThen EI includes:1 unit from BI1 unit*$6=$6Total EI:1 UnitsTotal EI in dollar:$6COGS=Goods available for sale-EI$213 6=$205Earnings management through layer dippingLIFO(with less dipping)LIFO(with more dipping)Revenues(assumed)$250$250COGS 237 20
29、5Income before tax 13 45Income tax(35%)4.55 15.75Net Income 8.54 29.25Incomparability between financial statements prepared under LIFO and under FIFODue to the different inventory pricing methods,net incomes may not be compared across firms.Certain disclosure in annual report may help convert LIFO-b
30、ased net income to FIFO-based net income.Incomparability between financial statements prepared under LIFO and under FIFOIn one year,GEs BI under LIFO is$3,161,and EI under LIFO is$3,343,COGS under LIFO is$17,751.In a footnote,it says“If the FIFO method of inventory accounting had been used to value
31、all inventories,they would have been$2,240 higher at year-end and$1,950 higher at beginning of the year.”Incomparability between financial statements prepared under LIFO and under FIFOLIFO inventory equation:3,161(BI)+Purchase 3,343(EI)=17,751(COGS)FIFO inventory equation:(3,161+1,950)+purchase (3,3
32、43+2,240)=(3,161+Purchase 3,343)+(1,950 2,240)=17,751+1,950 2,240=17,461(COGS)FIFO income before tax would be$290 higher than LIFO net income 1、有时候读书是一种巧妙地避开思考的方法。2023/5/22023/5/2Tuesday,May 2,20232、阅读一切好书如同和过去最杰出的人谈话。2023/5/22023/5/22023/5/25/2/2023 8:10:59 AM3、越是没有本领的就越加自命不凡。2023/5/22023/5/22023/5
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