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AMERICAN INTERNATIONAL UNIVERSITY OF BANGLADESH

FINANCIAL ACCOUNTING COURSE COORDINATOR: MD. ZAKARIA MASUD SECTION: F

PRESENTATION TOPIC: INVENTORY VALUATION METHOD

ECSTASY
Pangkaj Kumer Saha 08-10369-1 Ushnish Ahmed 08-10354-1 Mir Shabbir Hossain 08-10397-1 M. Hasib Uddin 08-10116-1

Iftehaj Mamur 08-10407-1

INVENTORY VALUATION

Valuation of inventory

What is a inventory

Inventory classification

Physical goods

Determining owner Goods in transit

Inventory accounting system

Cost flow Assumptions a) FIFO b)LIFO c)AVERAGE

Effects of cost Flow assumptions

WHAT IS A INVENTORY?

Assets which are intended for sale It is a important barometer of business. It affect both the balance sheet and income statement.

INVENTORY CLASSIFICATION

Business with inventory a) Merchandiser b) manufacturer

PHYSICAL GOODS
Counting, weighing, or measuring each kind of inventory on hand involves physical inventory count.

DETERMINING OWNER OF GOODS IN TRANSIT


Goods in transit should be included in the inventory of the party that has legal title to the goods. FOB destination point FOB shipping point

GOODS IN TRANSIT

INVENTORY ACCOUNTING SYSTEM


Periodic inventory system Perpetual inventory system

PERIODIC INVENTORY SYSTEM


When merchandise is purchased for resale the temporary account purchases is debited. Purchases can be in cash or on account Normally it is recorded by the buyer. Credit should be supported by purchase in voice.

PERPETUAL INVENTORY SYSTEM


The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold. Under a perpetual system Cost of Goods sold is determined each time a sale occurs.

COST FLOW ASSUMPTIONS


The most perfect and used cost flow methods are: 1.First-in, first out (FIFO) 2.Last-in, last out (LIFO) 3.Average cost

FIFO
The earliest goods purchased are first to be sold. Actual flow of merchandise often parallels by FIFO. Cost of the earliest goods purchased are the first to be recognized as Cost of Goods Sold.

ILLUSTRATION OF FIFO METHOD


Pool of Costs Cost of Goods Available for Sale Unit Explanation Units Cost Beginning inventory 100 $10 Purchase 200 11 Purchase 300 12 Purchase 400 13 Total 1,000 Total Cost $ 1,000 2,200 3,600 5,200

Date 01/01 04/15 08/24 11/27

Step 1 Ending Inventory Unit Total Date Units Cost Cost 11/27 400 $ 13 $ 5,200 08/24 50 12 600 450

Step 2 Cost of Goods Sold

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$ 12,000 5,800

LIFO
The latest goods purchased are the first to be sold under LIFO method. Actual physical flow seldom coincides with by LIFO. Costs of latest goods purchased are the first to be cost of goods sold under LIFO.

ILLUSTRATION OF LIFO METHOD


Pool of Costs Cost of Goods Available for Sale Unit Explanation Units Cost Beginning inventory 100 $10 Purchase 200 11 Purchase 300 12 Purchase 400 13 Total 1,000 Total Cost $ 1,000 2,200 3,600 5,200

Date 01/01 04/15 08/24 11/27

Step 1 Ending Inventory Unit Total Date Units Cost Cost 01/01 100 $ 10 $ 1,000 04/15 200 11 2,200 08/24 150 12 1,800 450

Step 2 Cost of Goods Sold

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$ 12,000 5,000

AVERAGE METHOD
The average cost method assumes that the goods available for sale have the same cost per unit. (average) Cost of Goods available for sale allocated
on the basis of weighted average unit cost under average method.

The weighted average unit cost is then applied to the units on hand.

ILLUSTRATION OF AVERAGE METHOD


Pool of Costs Cost of Goods Available for Sale Unit Explanation Units Cost Beginning inventory 100 $10 Purchase 200 11 Purchase 300 12 Purchase 400 13 Total 1,000 Total Cost $ 1,000 2,200 3,600 5,200

Date 01/01 04/15 08/24 11/27

Step 1 Ending Inventory $ 12,000 1,000 = $12.00 Unit Total Units Cost Cost 450 x $ 12.00 =

Step 2 Cost of Goods Sold Cost of goods available for sale Less: Ending inventory Cost of goods sold $ 12,000 5,400

ADVANTAGES AND DISADVANTAGES


FIFO MEHTOD LIFO MEHTOD AVERAGE METHOD
Hard to manipulate Produces "inventory" Makes physical sense profits Doesnt minimize Good ending taxes inventory valuation

Minimizes taxes in

Easy to manipulate

Hard to manipulate Easy to calculate

Averages may not reflect inflation well

USE OF COST FLOW METHODS

EFFECTS OF COST FLOW METHODS: INCOME STATEMENT


In periods of increasing prices FIFO reports the highest net income LIFO the lowest average cost falls in the middle. In periods of decreasing prices FIFO will report the lowest net income LIFO the highest average cost in the middle. middle.

EFFECTS OF COST FLOW METHODS: BALANCE SHEET

In a period of increasing prices, costs allocated to ending inventory using:


FIFO will approximate current costs. LIFO will be significantly understated. understated.

QUESTION-ANSWER SESSION