Ebook Accounting in the finance world: Part 2
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Ebook Accounting in the finance world: Part 2
chapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2Comp a ny Seed a Cost Flow Assumption ÚLReịK'Ebook Accounting in the finance world: Part 2
companies report many events in the same manner.2Know that the selection of a particular cost flow assumption is necessary when inventory is sold.3Apchapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2O, and averaging.Question: hl the coverage of financial accounting to this point, general standardization has been evident. Most transactions are recorded in an identical fashion by all companies. This defined structure helps ensure understanding. It also enhances rhe ability of decision makers to c Ebook Accounting in the finance world: Part 2ompare results from one year to the next or from one company to another. For example, inventory—except In unusual circumstances—is always I eported atEbook Accounting in the finance world: Part 2
historical cost unless its value is lower. Experienced decision makers should be well aware of that criterion when they are reviewing the inventory fchapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2tency in the reporting of inventory (emphasis added).Mitsui & Co. (U.S.A.) Inc.—as of March 31. 2009: “Inventories, consisting mainly of commodities and materials for resale, are stated at the lower of cost, principally on the specific-identification basis, or market."Johnson Ẳ’ Johnson and Subsidia Ebook Accounting in the finance world: Part 2ries—as of December 28,2008: “Inventories are stated at the lower-of-cost-or-market determined by the first-in, first-out method."Safeway Inc. and SubEbook Accounting in the finance world: Part 2
sidiaries—as of December 31,2008: “Merchandise inventory of SI,740 million at vear-end 2008 and $1,866 million at year-end 2007 is valued at the lowerchapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2ristol-Myers Squibb—as of December 31,2008: “Inventories are generally staled at average cost, not in excess of market."“Specific identification basis," “first in, first out,” “last in. first out,” “average cost” what information Jo these terms provide? why are all of these companies using different Ebook Accounting in the finance world: Part 2 methods? In the financial reporting of inventory, what is the significance of disclosing that a company applies “first-in, first-out," "last-in, firsEbook Accounting in the finance world: Part 2
t-out,”or the like?Answer: In the previous chapter, the cost of all inventory items was kept constant over time. Although that helped simplify the inichapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2 up and down like a yo yo in recent years. The cost of some commodities, such as bread and soft drinks, has increased gradually for many decades. In other industries, prices actually tend to fall over time. New technolog)' products often start with a high price that drops as the manufacturing proces Ebook Accounting in the finance world: Part 2s ramps up and becomes more efficient. Several years ago, personal computers cost tens of thousands of dollars and now sell for hundreds.A key event iEbook Accounting in the finance world: Part 2
n accounting for inventory is the transfer of cost from the inventor)' T-account to cost of goods sold as the result of a sale. The inventory balance chapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2as an identical cost, no problem exists. This standard amount is always reclassified into expense to reflect the sale.However, if inventory items are acquired at different costs, which cost is moved from asset to expense? At that point, a cost flow assumption must be selected by company otlicials Io Ebook Accounting in the finance world: Part 2 guide re|H>rling. dial choice can have a signiticanl impact on both llie income statement and I he balance sheet. II is literally impossible Io analyEbook Accounting in the finance world: Part 2
ze I he repoi led riel income and inventory balance of a company such as ExxonMobil without knowing the cost flow assumption that has been applied.Quechapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2ash. On October 26, Year One, one blue dress shirt is bought for $50 in cash for resell purposes. Idler, near the end of the year, this style of shirt becomes especially popular. On Decern Iter 29, Year One, the store’s manager buys a second shirt exactly like the first but this time at a cost of $7 Ebook Accounting in the finance world: Part 20. Cash on hand9.1 The Necessity of Adopting a Cost Flow Assumption304chapter 9 why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Ebook Accounting in the finance world: Part 2
has been depleted completely (S120 less $50 and $70) but the company naw holds two shirts in its inventory.Then, on December 31, Year One, a customer chapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2the end of the year and cash of $110. It also reports sales revenue of $110. Those facts are not in doubt.From an accounting perspective, two questions are left to be resolved (1) what is the cost of goods sold repor ted for rhe one shirt that was sold and (2) what is the cost remaining in inventory Ebook Accounting in the finance world: Part 2 for the one item still on hand?in simpler terms, should the $50 or $70 be reclassified to cost of goods sold; should the $50 or $70 remain in endingEbook Accounting in the finance world: Part 2
inventory? For financial accounting, the importance of the answers to those guestions cannot be overemphasized, what are the various cost flow assumptchapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 C Ebook Accounting in the finance world: Part 2. Companies that use this approach are not making an assumption because they know which item was sold. By some technique, they are able to identify the inventory conveyed to the customer and reclassify its cost to expense.For some types of inventory, such as automobiles held by a car dealer, specifi Ebook Accounting in the finance world: Part 2c identification is relatively easy to apply. Each vehicle tends to be somewhat unique and can be tracked through identification numbers. UnfortunatelEbook Accounting in the finance world: Part 2
y, for many other types of inventory, no practical method exists for determining the physical flow of merchandise.chapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 Cchapter 9why Does a Company Need a Cost Flow Assumption in Reporting Inventory?Video Clip(click to see video)Joe iritrodiices chtyter Ọ "why Does <1 CGọi ngay
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