Reporting Inventory
Chapter 19
Review:
Perpetual system
 Periodic system
 Inventory is an asset until it is sold, at
which time it “becomes” the expense
Cost of Goods Sold.

Here is the problem:
Beg. Invent is 10 units @ $2
Purchased 20 units @ $3
Sold 15 units.
Which 15 were sold? Which 15 are still in
inventory?
Answer:
Specific I.D. - you know which ones
were sold.
 Average: (10 x $2) + (20 x $3) = $80 / 30
= $2.67 per unit cost.
 FIFO: the 10 units from beg. Invent. + 5
from purchase were sold.
 LIFO: the 15 from the most recent
purchases were sold.

Why so many choices?
FIFO: Gives a better Balance Sheet number
- inventory reported at most recent costs.
 LIFO: Gives a better Income Statement
number for CGS - most recent costs.

Which is better, LIFO or FIFO?

Since CGS is an expense and therefore
reduces net income AND taxable income, a
company should choose the method which
results in the highest CGS.
 When
prices are rising, this is LIFO.
 When prices are falling, this is FIFO.
Why not use FIFO for “books”
and LIFO for the tax return?

IRS says we can’t do that! (Too bad, it
would be the “best of both worlds”.)
Inventory disclosure in financial
statements:
Must tell F/S reader what cost flow
assumption you are using.
 Must report inventory at LCM. (We do this
because of the conservatism principle.)

 A loss
CGS.
of inventory market value increases
Sometimes we have to estimate
inventory.

Two methods commonly used:
 1.
Gross Profit method.
 2. Retail method.
Gross Profit Method:
Use past data to estimate the Gross Profit
percentage.
 “Work backwards” to plug in the ending
inventory. (pg. 685.)

Retail Method:

Allows retailer to take an inventory at retail
prices and then “convert” those prices to
cost.
 Follow
page 686.
Cash Flow Statement
Last semester - direct method.
 This chapter - indirect method. (We’ll cover
only the operating activities section & later
cover the other two sections.)
 I will not lecture on this - follow the
example in your book.

The End