...ACCOUNTING FOR INVENTORIES For Merchandising Firms Inventories are valued at cost, net of discounts, and including transportation and other costs (ie: import duties) to prepare the goods for sale. Buying Inventory: * DR Merchandise Inventory, CR Cash/Accounts Payable Selling Inventory: * DR A/R or Cash, CR Revenues * DR Cost of Goods Sold Expense, CR Merchandise Inventory Lower of Cost or Market (LOCOM): * Inventories can sometimes decrease in value while stored due to market conditions, obsolescence or damage * Accounting standards require firms to subject their inventories to an impairment test at fiscal year-end and, where the FMV < Purchase Price, write down the value of their inventory * FMV in IRFS = “net realizable value”; in US GAAP = “replacement cost” * For example, if you purchased 200 ropes at $40 but they are only worth $30 at year end: * DR Impairment expense $2000, CR Accumulated Inventory Impairment $2,000 * The reason we don’t subtract impairment directly from merchandise inventory is because the loss is still unrealized and there is a possibility of recovery in the future. * For example, say market conditions improved and now ropes were valued at $50 * DR Accumulated Inventory Impairment $2,000, CR Impairment Expense $2,000 * Here it does not matter how much greater the value is, we do not account for increases in value Methods of Inventory Valuation ...
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...Introduction International accounting standard No.2 (IAS2) "Inventory" gives the rules which should be followed during the recording and presentation of inventory. Inventory refers to goods which are held by a firm for sale, are in the production process or are materials which will be consumed in the production process or in giving out of services. This standard does not apply to financial instruments and it gives out a guideline on how to measure an asset which is categorized as an inventory, which concept constitute of the cost and at what time an expense occurs and the information that should be disclosed while preparing the financial statements (International Accounting Standards Board, 2008, p.977). History In the year 1974 during the draft of standard, the name was changed to "inventories" from "valuation and presentation of Inventories in the Context of the Historical Cost System" the first draft was affected on 1st of January in the year 1995 and this was 21 years after the first draft exposure. On 18th of December 2003, the standard was revised and took effect as from the strart of January 2005. In the year 2003, there was a revised IAS 2 whereby different cost formulas for inventories were incorporated into the standard. These were superseded from SIC 1 on consistency. On December 1997, SIC 1 was issued and was effective as from 1st January 1999. sic 1 required that that the same cost formula was to be used for inventories with the same characteristics under IAS...
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...Accounting for inventory under IFRS and U.S. GAAP ABSTRACT U.S. General Accepted Accounting Standards (U.S. GAAP) and International Financial Reported Standards (IFRS) both give guidance for inventory valuation. This study will give several examples, compare cost flow assumptions and inventory valuation under U.S. GAAP and IFRS, and indicate the possible influences to reported companies and financial information users. INTRODUCTION The U.S. Securities and Exchange Commission (SEC) continues to move forward in its proposed plans to replace U.S. GAAP for U.S. public companies with IFRS. Inventory valuation is important, because inventory is a crucial element not only in the computation of profit, but also in the valuation of assets for balance sheet purposes. Unfortunately, inventory values sometimes are manipulated by management in order to create a more favorable impression. In the following sections, I introduced several differences between U.S. GAAP and IFRS. I also analysis the possible reasons of information manipulation and influence. In section one and section two respectively I will talk about differences in cost flow assumptions and inventory valuation under both methods. I. COST FLOW ASSUMPTIONS Companies typically purchase merchandise at several different prices. Ending inventory equals the quantity on hand multiply the unit acquisition price. If a company use historical cost to determine the cost of inventory and it purchases inventory at different unit prices...
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...The choice of inventory accounting methods, specifically for the case of FIFO and LIFO, has developed into a decision, which includes varying consequences and comes with specific implications and benefits, such as communicating private information with FIFO (Hughes, and Schwartz, 1988, p.42) or tax benefits for the choice of LIFO (Morse and Richardson, 1983, p.125). Every firm and manager has to face the decision of which accounting method to choose, and has to include several aspects into their decision making process and weigh the pros and cons in general. However, the empirical evidence (Frankel and Hsu, 2015, p.48) shows some controversies as to what inventory accounting methods firms decided to use in the past, even though the theory would...
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...BACK FLUSH ACCOUNTING 1.0 Introduction Back flush accounting is one of the accounting systems that support Just in Time system. Just in time is the inventory system that produced the required items at the right time and the right place. Accounting was delay the recording of transaction during process is known as back flush accounting. The system is the transaction was only recorded once the product was completed. Back flush accounting is the system that focuses on the output of organization and then work backwards when allocating costs between costs of goods sold and inventories, with no separate accounting for work in progress. According to ACCA article, in back flush accounting costs are not associated with units until they are completed or sold. Back flush accounting is also called delayed costing, as costs are not allocated to production until after events have occurred. From view by other author, back flush accounting is a costing system that omits recording some of all of the journal entries relating to the cycle from purchase of direct materials to the sales of finished goods (Robert, 2011). According to Grahame Steven, Financial Management 2006, an approach called back flush accounting has been developed to meet the requirement of JIT manufacturing which on it is not a sequential tracking system and does not account for individual transaction. Backflush accounting meshes well with Just-In-Time production system because, according to the Tax Shield Education, both...
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...Preamble [Not Part of the Accounting Standards Codification] This HTML transformation of the FASB Accounting Standards Codification is provided by Public.Resource.Org as a public service. Please note that these documents are based on the 2011 printed version of the codification, which is out of date. For the latest, authoritative version of these standards, we recommend you consult https://asc.fasb.org/ which is provided by the Financial Accounting Standards Board. End of Preamble [Not Part of the Accounting Standards Codification] 330 Inventory 10 Overall 00 423 Status 423 General 423 Overview and Background 423 General 423 Objectives 423 General 423 Scope and Scope Exceptions 424 General 424 20 Glossary 424 30 Initial Measurement 425 General 425 Subsequent Measurement 428 General 428 Other Presentation Matters 432 General 432 Disclosure 433 General 433 Implementation Guidance and Illustrations 434 General 434 Status 437 General 437 Subsequent Measurement 437 05 10 15 35 45 50 55 S00 S35 General Disclosure 438 438 Implementation Guidance and Illustrations 438 438 SEC Materials 438 General S99 437 General S55 421 437 General S50 Other Presentation Matters General S45 437 438 905 442 908 Airlines 442 910 Contractors—Construction 442 912 Contractors—Federal Government 442 926 Entertainment—Films 442 930 Extractive Activities—Mining 443 932 Extractive Activities—Oil and Gas 443 976...
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...Department of Accounting A Graduation Research Proposal Presented to the Faculty of Commerce The Islamic University of Gaza Prepared By Mosa zuhair al-nassan Mosbah al-shaghnobi Mohammed Nabaheen 120091941 120092552 120102597 Supervisor's name Mr. Salah Shubir 3102 I I A Holy Qur'an Verse A Holy Qur'an Verse } وَقُل اعْمَلُوا فَسَيَرَى اللَّهُ عَمَلَكُمْ وَرَسُولهُ وَالْمُؤْمِنُونَ{ سورة التوبة– اآلية 105 صدق اهلل العظيم I Dedication Dedication We dedicate this work to our lovely Palestine, to second home of Islamic university, and to our parents, who sacrificed everything in their life for us, and also we thank them for pushing us to success. For all of Those, Who are inspiring us and see us on our way. II II Acknowledgement Acknowledgement In the beginning, we thank Allah for giving us the strength and health to let this work see the light and our parents for their help and support. Our Prophet Mohammed said: “Who doesn’t thank people he doesn’t thank Allah”. We want to thank everyone help and participated in making this study starting from our honorable: Mr. Salah Shubair. Who put a lot of faith in our capabilities and encouraged us to complete this study. We thank all of our teachers in the faculty of commerce and our colleagues and friends for their support . III Abstract Abstract The study aims to discuss and evaluate one of the accounting problems, which...
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...disadvantages of accounting for inventory under the perpetual inventory system The major difference between the two methods of recording for inventory accounting systems (perpetual and periodic) is the extent to which stock movements are monitored. The physical system of recording for inventory does not keep records of the movements of stock. The only information in the ledger concerning merchandise is the recording in the stock account of the total inventory determined by a physical stock-take at the end of each accounting period. However, under the perpetual inventory method, individual items of merchandise are recorded on stock cards and a stock control account is kept continuously up to date by recording movements of all inventories into and out of the business. Perpetual inventory involves keeping records of all stock movements throughout the accounting period. (It is also known as the continuous inventory method.) This method updates the balance of stock on hand on a continuous basis throughout the period allowing a greater control over stock. Every time stock moves in or out of the business, the inventory balance is updated. When stock is purchased, the balance is increased. When sales are made, the balance will be decreased. Sales returns have the effect of increasing stock on hand and purchase returns decrease the stock on hand. Withdrawals of inventory by the proprietor must also be accounted for, as this will decrease the balance of stock. As inventory is always recorded...
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...CHAPTER 14 Managerial Accounting ASSIGNMENT CLASSIFICATION TABLE Brief Exercises 1 A Problems B Problems Study Objectives *1. Explain the distinguishing features of managerial accounting. Identify the three broad functions of management. Define the three classes of manufacturing costs. Distinguish between product and period costs. Explain the difference between a merchandising and a manufacturing income statement. Indicate how cost of goods manufactured is determined. Explain the difference between a merchandising and a manufacturing balance sheet. Identify trends in managerial accounting. Prepare a worksheet and closing entries for a manufacturing company. Questions 1, 2, 3 Do It! 1 Exercises 1 *2. 4, 5, 6, 7, 8 11, 12 2, 3 1 *3. 4, 5, 7 2 2, 3, 4, 5, 6 3, 4, 5, 7, 13 8, 12, 13, 14, 15, 17 1A, 2A 1B, 2B *4. 13 6 2 1A, 2A 1B, 2B *5. 9, 14 3A, 4A, 5A 3B, 4B, 5B *6. 15, 16, 17, 18 8, 10, 11 3 8, 9, 10, 11, 12, 13, 14, 15, 16, 17 14, 15, 16, 17 3A, 4A, 5A 3B, 4B, 5B *7. 10, 19, 20, 21 9 3A, 4A 3B, 4B *8. 22, 23, 24 25, 26 27, 28, 29 12 4 18 *9. 19 6A *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter. Copyright © 2011 John Wiley & Sons, Inc. Kimmel, Accounting, 4/e, Solutions Manual (For Instructor Use Only) 14-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A Difficulty Level Simple Time Allotted (min.) 20–30 Description Classify manufacturing costs into different...
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...Valuation of Inventories: A Cost-Basis Approach ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1, 2, 3, 5 1. Inventory accounts; 1, 2, 3, 4, determining quantities, 5, 6, 8, 9 costs, and items to be included in inventory; the inventory equation; balance sheet disclosure. 1, 3 1, 2, 3, 4, 5, 6 1, 2, 3 2. Perpetual vs. periodic. 2 9, 13, 17, 20 4, 5, 6 3. Recording of discounts. 10, 11 7, 8 3 4. Inventory errors. 7 4 5, 10, 11, 12 2 5. Flow assumptions. 12, 13, 16, 18, 20 5, 6, 7 9, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 1, 4, 5, 6, 7 5, 6, 7, 8, 11 6. Inventory accounting changes. 18 7 6, 7, 10 7. Dollar-value LIFO methods. 22, 23, 24, 25, 26 1, 8, 9, 10, 11 8, 9 Copyright © 2013 John Wiley & Sons, Inc. 14, 15, 17, 18, 19 8, 9 Kieso, Intermediate Accounting, 15/e, Solutions Manual 4 (For Instructor Use Only) 8-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Identify major classifications of inventory. 1 1 2. Distinguish between perpetual and periodic inventory systems. 3 2 4, 9, 13, 17 4, 5, 6 3. Determine the goods included in inventory and the effects of inventory errors on the ...
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...CHAPTER 9 Inventories: Additional Valuation Issues ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Concepts for Analysis Exercises Problems 1, 2, 3, 9, 10 1, 2, 3, 5 6 1. Lower-of-cost-or-market. 1, 2, 3, 4, 5, 6 1, 2, 3 1, 2, 3, 4, 5, 6 2. Inventory accounting changes; relative sales value method; net realizable value. 7, 8 4 7, 8 3. Purchase commitments. 9 5, 6 9, 10 9 4. Gross profit method. 10, 11, 12, 13 7 11, 12, 13, 14, 15, 16, 17 4, 5 5. Retail inventory method. 14, 15, 16 8 18, 19, 20, 22, 23, 26 6, 7, 8, 10, 11 6. Presentation and analysis. 17, 18 9 21 9 19 10 22, 23 12, 13, 14 11 24, 25, 26, 27 11, 13 28 13, 14 *7. LIFO retail. *8. Dollar-value LIFO retail. *9. Special LIFO problems. 4, 5 *This material is discussed in an Appendix to the chapter. Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 9-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Questions Exercises Problems 1. Describe and apply the lowerof-cost-or-market rule. 1, 2, 3, 4 1, 2, 3 1, 2, 3, 4, 5, 6 1, 2, 3, 9, 10 2. Explain when companies value inventories at net realizable value. 5, 6, 7 1, 2, 3 1, 2, 3, 4, 5, 6 1, 2, 3, 9, 10 ...
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...Inventory Auditing Inventory Auditing Inventory is tangible goods held by a company to support production, support activities or for sale or customer service. They are comprised normally of parts, tools, maintenance supplies, raw materials, work in progress, finished goods and waste or by-products (Inventory, 2012). Inventory is often the main item in the current assets category, and must be accurately counted and valued at the end of the accounting period to ascertain a company's profit or loss. Organizations whose inventory items have a bigger unit cost often keep a daily record of changes in inventory (perpetual inventory method) to ensure accurate control. Similarly, companies with smaller inventory item cost most often update inventory records at the end of an accounting period (periodic inventory method) (Inventory and COGS, 2012). The value of an inventory depends on the valuation method used, such as first-in, first-out (FIFO) method or last-in, first-out (LIFO) method (Inventory and Cost of Goods Sold, 2012). Generally Accepted Account Principles require that inventory should be valued on the basis of either its cost or its current market price, whichever is lower to prevent overstating of assets and earnings due to an increase in the inventory's value in inflationary periods (Section 3140: Inventory, 2012).. Methods Inventory audits usually start when auditors meet with a company’s owner or manager. Auditors will discuss the company’s...
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...Retailors define inventory as intended sellable assets consisting of goods that are available for resale to customers. Manufacturers also maintain three components of inventory which consist of finished goods these are goods that have been completed and are awaiting sales. Manufacturers may also have work in process inventory made up goods being manufactured but not yet completed. The third category of inventory is raw material, consisting of goods that are to be used in producing products. Overall, inventory should include all cost that are both ordinary and necessary to put goods in place and in condition for their resale. There are three basis approaches to valuing inventory that are allowed by Generally Accepted Accounting Principles (GAAP). First-in, first-out (FIFO) is an inventory method that assumes that the first items produced or purchased in the inventory are the first ones sold. This inventory method is acceptable under the U.S. Generally Accepted Accounting Principles (GAAP), as well as the International Financial Reporting Standards (IFRS). FIFO is most often used in accordance with the restaurant industry or businesses that deal with perishable products. This allows them to use all of their products before they expire or go to waste, which helps to lower their food costs. “In a period of inflation, FIFO produces a higher net income because the lower unit costs of the first units purchased matched against revenues. In a period of rising prices, FIFO reports...
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...and annual periods ending after September 15, 2009 even though the authoritative version of the Codification was released on July 1, 2009. b. Did the FASC change prior GAAP? The FASC did not change prior GAAP but it instead reorganized previous GAAP into a new structure. This new structure is organized into a new research database that is supposed to be user friendly and make finding certain GAAP easier to use. c. What does the FASB expect from the new FASC structure and system? The FASB has high expectations from the new FASC system including reducing the amount of time and effort that is used to solve an accounting research issue. The FASC also expects the Codification to mitigate the risk of noncompliance through easier usability of accounting literature. The Codification is also expected to provide accurate information through real time updates whenever Accounting Standards Updates are released and to assist the FASC with all of the research and convergence efforts. d. What are the “topics” used in the ASC? There are six major topics that are used in the ASC. The first one is The General Principles Area which includes broad conceptual matters. The next one is The Presentation Area which shows information is presented in the financial statements. The Assets, Liabilities, and Equity Areas have guidance on all of the balance sheet accounts while the Revenue and Expense Areas have guidance on all of the income statement accounts. The next topic that is used in the ASC is...
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...accounting issue memorandUM to: Audit files FROM: [YOUR NAME], MEMBER OF AUDIT TEAM FOR PARKER & PROCK APPROVED BY: FRANK REEDY, ENGAGEMENT MANAGER ON AUDIT FOR PARKER & PROCK SUBJECT: TREATMENT OF MANUFACTURING OVERHEAD COSTS AT PARKER & PROCK FOR YEAR ENDING DECEMBER 31, 2013 DATE: JANUARY 16, 2014 CC: CLAIRE ALLYSON, CONTROLLER, PARKER & PROCK In performing the audit planning for the audit of Parker & Prock (P&P) for the year ending December 31, 2013, we discovered that P&P has an accounting policy that results in only direct manufacturing labor and direct material costs being included in the cost of manufactured inventory. Furthermore, this accounting policy results in all other costs, including those properly categorized as “manufacturing overhead,” being accounted for as period costs that are being expensed as incurred. This accounting policy has the effect of understating inventory balances at period end and as well as understating the cost of goods sold and overstating operating expenses for the period. P&P is a private company. Prior to undertaking tests of inventory balances, we determined that a review of P&P’s inventory accounting policy was warranted. The subject of this review is to research whether P&P’s treatment of manufacturing overhead is in accordance with generally accepted accounting principles (GAAP). In performing our research we used the FASB Accounting Standards Codification (the Codification). Within the Codification we identified...
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