6-1 Preview of Chapter 6 6-2 One Classification:  Inventory Three Classifications:  Raw Materials  Work in Process  Finished Goods Merchandising Company Manufacturing Company Regardless of the classification, companies report all inventories under Current Assets on the Statement of Financial Position. Classifying Inventory 6-3 Unit costs can be applied to quantities on hand using the following costing methods:  Specific Identification  First-in, first-out (FIFO)  Average-cost LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. Cost Flow Assumptions Inventory Costing 6-4 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 6-2 Inventory Costing LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. 6-5 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 6-3 Inventory Costing LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. 6-6 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. Inventory Costing Specific Identification LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. 6-7 Inventory Costing LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. There are two assumed cost flow methods: 1. First-in, first-out (FIFO) 2. Average-cost Cost flow does not need be consistent with the physical movement of the goods. 6-8 Illustration: Data for Lin Electronics’ Astro condensers. Illustration 6-4 (Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold Inventory Costing LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. 6-9  Earliest goods purchased are first to be sold.  Often parallels actual physical flow of merchandise.  Generally good business practice to sell oldest units first. First-In-First-Out (FIFO) Inventory Costing LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. 6-10 Illustration 6-5 LO 2 First-In-First-Out (FIFO) Inventory Costing [...]... Illustration 6-8 6-13 LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods Inventory Costing Average Cost Illustration 6-8 6-14 LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods Inventory Costing Financial Statement and Tax Effects Illustration 6-9 6-15 LO 3 Explain the financial effects of the inventory cost flow... LO 5 Indicate the effects of inventory errors on the financial statements Inventory Costing Statement of Financial Position Effects Effect of inventory errors on the statement of financial position is determined by using the basic accounting equation: Illustration 6-11 Illustration 6-14 6-30 LO 5 Indicate the effects of inventory errors on the financial statements LCNRV Basis; Inventory Errors (a)... lower-of-cost-or-net realizable value basis of accounting for inventories Inventory Costing Lower-of-Cost-or-Net Realizable Value Illustration: Assume that Gao TV has the following lines of merchandise with costs and net realizable values as indicated Illustration 6-10 6-22 LO 4 Explain the lower-of-cost-or-net realizable value basis of accounting for inventories Inventory Errors Common Cause:  ... basis of accounting for inventories and apply the inventory cost flow methods Inventory Costing Average Cost   Assumes goods are similar in nature  6-12 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 LO 2 Explain the basis of accounting for inventories. .. inventory errors on the financial statements Inventory Costing Income Statement Effects Inventory errors affect the computation of cost of goods sold and net income in two periods   Over the two years, the total net income is correct because the errors offset each other  6-27 An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period Ending... accuracy of taking and costing the inventory LO 5 Indicate the effects of inventory errors on the financial statements Inventory Costing Illustration 6-13 Combined income for 2year period is correct 6-28 (€3,000) Net Income understated €3,000 Net Income overstated LO 5 Indicate the effects of inventory errors on the financial statements Inventory Costing Question Understating ending inventory will overstate:... recognizing the transfer of legal title to goods in transit  6-23 Failure to count or price inventory correctly Errors affect both the income statement and statement of financial position LO 5 Indicate the effects of inventory errors on the financial statements Linville Company had beginning inventory on May 1 of €12,000 During the month, the company made purchases of €30,000 but returned €2,000 of goods... 6-31 LO 5 Indicate the effects of inventory errors on the financial statements LCNRV Basis; Inventory Errors (b) Visual Company overstated its 2013 ending inventory by NT$22,000 Determine the impact this error has on ending inventory, cost of goods sold, and equity in 2013 and 2014 6-32 LO 5 Indicate the effects of inventory errors on the financial statements The Entertainment Center accumulates... Cost of goods sold subtracted from sales There also should be disclosure of 1) major inventory classifications, 2) basis of accounting (cost or LCNRV), and 3) costing method (specific identification, FIFO, or average) 6-35 LO 5 Indicate the effects of inventory errors on the financial statements Statement Presentation and Analysis Analysis Inventory management is a double-edged sword 1 High Inventory... Cost Flow Methods Consistently   6-20 Method should be used consistently, enhances comparability Although consistency is preferred, a company may change its inventory costing method LO 3 Explain the financial effects of the inventory cost flow assumptions Inventory Costing Lower-of-Cost-or-Net Realizable Value When the value of inventory is lower than its cost   6-21 Companies must “write down” . Identification LO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. 6-7 Inventory Costing LO 2 Explain the basis of accounting for inventories and apply the inventory. the basis of accounting for inventories and apply the inventory cost flow methods. 6-13 Illustration 6-8 Inventory Costing Average Cost LO 2 Explain the basis of accounting for inventories and. the basis of accounting for inventories and apply the inventory cost flow methods. Illustration 6-8 6-15 LO 3 Explain the financial effects of the inventory cost flow assumptions. Financial Statement