University:
Widener University
Course:
COMPSCI 345 | Practice and Applications of Data Management
Academic year:

2023
Views:

114

Pages:

7
Author:

deificam22

Corporate Accounting Recitation 4 Accounting for Inventory – Cost flow assumption InvEB = InvBB + Purchase/Production– COGS Cost Flow Assumptions Specific Identification: used when specific products can be tracked (e.g. cars) FIFO (First In, First Out): COGS are assumed to be equal to the costs of the oldest available units in the financial records. LIFO (Last In, First Out): COGS are assumed to be equal to the costs of the most recently purchased units in the financial records. Averaging: COGS are assumed to be equal to a perunit weighted average cost at the end of the period Accounting for Inventory – a comparison of LIFO and FIFO LIFO Income Statement Balance Sheet New costs Old costs (if LIFO liquidation, then new costs and old costs) FIFO Old costs New costs Accounting for inventory – tax consideration LIFO conformity rule: if a firm uses LIFO for tax purpose, it must also use LIFO for financial reporting purpose. Given the tax effects, what types of firms would you expect to choose each inventory method? Accounting for inventory – LIFO Reserve LIFO Reserve = Ending Inv (FIFO) – Ending Inv (LIFO) = cumulative difference in FIFO – LIFO inventory Change in LIFO Reserve = COGS (LIFO) – COGS (FIFO) Cumulative tax savings by using LIFO = LIFO Reserve * tax rate Tax savings for a particular year by using LIFO = change in LIFO Reserve * tax rate Accounting for inventory – LIFO Reserve LIFO Inventory BB Purchase EB + LIFO Reserve BB COGS Change EB = FIFO Inventory BB Purchase EB COGS Summary of accounting for inventory Matching principle requires a cost flow assumption, leading to different accounting methods (LIFO vs. FIFO). Computation is trivial, but implications not: LIFO and FIFO produces temporary difference in accounting numbers. No accounting method is innately superior: choice depends upon business environment, incentives of users, possibility of manipulation, etc. Disclosure available to make numbers comparable across firms.