Lecture International accounting: Chapter 5 - Nguyễn Quốc Nhất

Lecture "International accounting - Chapter 5: Merchandise inventory" has content: Accounting principles and inventories, inventory costing methods, inventory accounting in a perpetual system, inventory accounting in a perpetual system.
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Lecture International accounting: Chapter 5 - Nguyễn Quốc NhấtInternational Financial AccountingChapter 5: Merchandise InventoryLearning ObjectivesChapter 5: MerchandiseInventoryMA. Nguyen Quoc Nhat5.1 Accounting Principles and InventoriesConsistency Principle Disclosure Principle Materiality Concept Accounting Conservatism5.1 Accounting Principles and InventoriesDisclosure PrincipleCompany should report enoughinformation for outsiders to make wisedecisions about the company.In short, the company should reportrelevant, reliable, and comparableinformation about itself.All major accounting decisions are describedin the footnotes to the financial statementsMA. Nguyen Quoc Nhat- nhatnq.faa@gmail.comDefine accounting principles related to inventoryDefine inventory costing methodsAccount for perpetual inventory using the threemost common costing methodsCompare the effects of the three most commoninventory costing methodsApply the lower-of-cost-or-market rule toinventoryMeasure the effects of inventory errorsEstimate ending inventory by the gross profitmethod5.1 Accounting Principles and InventoriesConsistency PrincipleBusinesses should use the sameaccounting methods from period to period.Consistency helps investors compare acompany’s financial statements from oneperiod to the next.5.1 Accounting Principles and InventoriesMateriality ConceptA company must perform strictly properaccounting only for significant items.Information is significant—or, in accountingterms, material—when it would causesomeone to change a decision.1International Financial AccountingChapter 5: Merchandise Inventory5.1 Accounting Principles and InventoriesAccounting Conservatismmeans exercising caution in reporting itemsin the financial statements.5.2 Inventory Costing MethodsGAAP allows are as follows1. Specific unit cost2. First-in, first-out (FIFO) cost3. Last-in, first-out (LIFO) cost4. Average cost5.2 Inventory Costing Methods2. First-in, first-out (FIFO) costThe cost of goods sold is based on theoldest purchases. Often reflects the actual physical flow ofmerchandise. Under FIFO, companies sell their oldestinventory first.MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com5.2 Inventory Costing MethodsEnding inventory = Number of units onhand x Unit cost Cost of goods sold = Number of unitssold x Unit cost Cost per unit = Purchase price –Purchase discounts – Purchase returns+ Freight in5.2 Inventory Costing Methods1. Specific unit costThe company knows exactly which item wassold and exactly what the item cost. Suitable for businesses that sell unique,easily identified inventory items, such asautomobiles (identified by the vehicleidentification number [VIN]), jewels (aspecific diamond ring), and real estate(identified by address)FIFO method assumes earliestgoods purchased are the first tobe sold2International Financial AccountingChapter 5: Merchandise Inventory5.2 Inventory Costing Methods3. Last-in, first-out (LIFO) costLIFO method assumes latest goodspurchased are the first to be soldThe cost of goods sold is based on themost recent purchases (new costs) Under the LIFO method, companies selltheir newest inventory first.5.2 Inventory Costing Methods4. Average costThe business computes a new average costper unit after each purchase.Ending inventory and cost of goods soldare then based on the same average costper unit.An average price is calculated and appliedto all goodsAverage cost method assumes thatgoods available for sale arehomogeneousMA. Nguyen Quoc Nhat- nhatnq.faa@gmail.comAllocation of the cost of goodsavailable for sale in average costmethod is made on the basis of theweighted average unit costMA. Nguyen Quoc Nhat5.2 Inventory Costing Methods3International Financial AccountingChapter 5: Merchandise Inventory5.3 Inventory Accounting in a PerpetualSystemFirst-In, First-Out (FIFO) Method5.3 Inventory Accounting in a PerpetualSystemJournal Entries Under FIFO July 26 Inventory (9 x$47)423Accounts payable423Purchased inventory on account. Jul 31 Accounts receivable 800Sales revenue800Sale on account. Jul 31 Cost of goods sold462Inventory462Cost of goods sold.5.3 Inventory Accounting in a PerpetualSystemJournal Entries Under LIFO Jul 5 Inventory (6 x$45)270Accounts payable270Purchased inventory on account Jul 15 Accounts receivable (4 $80) 320Sales revenue320Sale on account Jul 15 Cost of goods sold180Inventory180Cost of goods sold.MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com5.3 Inventory Accounting in a PerpetualSystemJournal Entries Under FIFO Jul 5 Inventory (6 x$45)270Accounts payable270Purchased inventory on account Jul 15 Accounts receivable (4 $80) 320Sales revenue320Sale on account Jul 15 Cost of goods sold170Inventory170Cost of goods ...