Chapter 7

LCM

LCM

A valuation rule, required inventory to be written down when it falls below its cost

Rising costs

FIFO makes company look more profitable, higher inventory values, lower COGS

Inventory

converted to cash within one year, current asset, initially recorded at cost

Net sales- COGS=

Gross profit

Specific Identification Method

Individually identifies and records the cost of each item sold as COGS

FIFO

first in first out, assumes that the inventory costs flow out in the order the goods are received

LIFO

Assumes that the inventory costs flow out in the opposite of the order the goods are received

WAC

Weighted average cost, uses WAC for the cost of each item sold and those remaining in inventory

Inventory costing methods

describe how to calculate the costs of goods sold

When inventory costs changes

in periods of deflation and inflation

The COGS will vary

Directly impacts NI

When faced with increasing costs per unit

A company that uses FIFO will have a higher income tax expense

LIFO is not allowed under

IFRS

LIFO conformity rule

IF LIFO is used on the income tax return, it must also be sued in the financial statement reporting

Can company change inventory costing method?

Accounting rules discourage it

Change in method is only allowed if it improves the accuracy of the company’s financial results

The value of inventory can fall below its recorded cost for two reasons

(1) It's easily replaced by identical goods at a lower cost or
(2) It becomes outdated or damaged

GAAP requires that inventory

be written down to its lower value, LCM, being conseravtive

Lower of cost or market

debit COGS, credit Inventory

Inventory is either on

Balance Sheet or Income statement