Classifying inventory
Merchandising company.  inventory
Manufaturing company
-Raw Material
-Work in Process (WIP)
-Finished Goods

JIT = just in time =stockless production=zero inventories

Perpetual system
-check accuracy of inventory records
-determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft

Periodic sys
-determine the inv on hand
-determine the cost of goods sold for the period

taking a physical inv
involves counting, weighing, or measuring each kind of inv on hand
companies often \"take inv\"
-when the business is closed or business is slow
-at the end of the accounting period

goods in transit
purchased goods not yet received
sold goods not yet delivered
should be included in the inv of the company that has legal title to the goods. legal title is determined by the terms of sale
FOB=free on board
Consigned goods 寄售
fraud anatomy. exaggerate the unit amount and unit cost to increase the amount of reported ending inv, thus reducing COGS and increasing net income

inv is accounted for at cost
-cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale
-unit costs are applied to quantities to compute the total cost of the inv and the cost of goods using the following costing methods(cost flow assumption)
specific identification
First-in, First-out FIFO
average-cost

LIFO. is banned under IFRS while permitted under GAAP

A major advantage of the FIFO method is that in a period of inflation, the costs allocated to ending inv will approximate their current cost

A major shortcoming of thr average-cost method is that. in a period of inflation, the cost allocated to ending inv may be understated in terms of current cost

lower-of-cost-or-net realizable value
when the value of inv is lower than its cost
companies must \"write down\" the inv to its net realizable value(amount that a company expects to realize (receive from the sale of inv) )

inv errors
common causes
-failure to count or price inv correctly
-not properly recognizing the transfer of legal title to goods in transit
-errors affect both the income stm and stm of financialposition

ending inv error.    assets.    liabilities.  equity
overstated.         overstated. no effect.  overstated
understated.     understated no effect.   understated
LCNRV Basis


Stm of financial position -inv classified as current asset
Income stm - COGS is substracted from sales


Stm presentation and analysis
inv management is a double-edged sword
-high inv levels may incur high carrying cost (e.g., investment, storage, insurance, obsolescence, and damage)
-low inv levels may lead to stock-outs and lost sales

inv turnover measures the number of times on average the inv is sold during the period
inv turnover = cost of goods sold/ average inv

days in inv measures the avg number of days inv is held. days in inv =days in year/inv turnover

存货周转率/存货周转天数

Improving inv control with RFID
many large retailers have improved their inv control with the introduction of radio frequency identification.

estimating inventories

Gross profit method
estimates the cost of ending inv by applying a gross profit rate to net sales
Step 1: Net Sales - Estimated Gross Profit =Estimated Cost of Goods Sold
Step 2: Cost of Goods Available for Sale - Estimated Cost of Goods Sold = Estimated Cost of Ending Inventory

Retail inv method
Company applies the cost-to-retail percentage. to ending inv at retail prices to determine inv at cost
Step 1 Goods Available for Sales at Retail -Net Sales = Ending Inventory at Retail
Step 2 Goods Available for Sale at Cost /Goods Available for Sale at Retail = Cost-to-Retail Ratio
Step 3 Ending Inventory at Retail * Cost-to-Retail Ratio = Estimated Cost of Ending Inventory
note that it is not necessary to take a physical inv to estimate the cost of goods on hand at any given time


GAAP provides more detailed guidelines in inv accing.
IFRS requires companies to use the same cost flow assumption for all goods of a similar nature.GAAP has no specific requirement in this area

similarities
the definitions for inv are essentially similar under GAAP and IFRS. Both define inventory as assets held-for-sale in the ordinary course of business, in the process of production for sale (WIP), or to be consumed in the production of goods or services(e.g., raw materials).
Who owns the goods-goods in transit or consigned goods -as well as the costs to include in inv, are accounted for the same under GAAP and IFRS.

both GAAP and IFRS permit specific identification where appropriate. IFRS actually requires that specific identification method be used where the inv items are not interchangeable (i.e. can be specifically identified).if the inv items are not specifically identifiabl, a cost flow assumption is used.GAAP does not specift situations in which specific identification must be used.
A major difference between IFRS n GAAP relates to the LIFO cost flow assumption.

when testing to see if the value of inv has fallen below its cost, IFRS defines market as net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less thr estimated costs to complete and sell. In other words, net realizable value is the best estimate of the net amounts that inventories are  expected to realize. GAAP, on the other hand, defines market as essentially replacement cost. The GAAP method of inv valuation is,often referred to as the lower-of-cost-or-market (LCM)

under GAAP, if inv is written down under the lower-of-cost-or-market valuation, the new basis is now considered its cost.As a result, the inv may not be written back up to its original cost in a subsequent period. Under IFRS, the write-down may be reversed in a subsequent period up to the amount of the previous write-down. Both the write-down and any subsequent reversal should be reported on the income stm.

IFRS generally requires pre-harvest inventories of agricultural products(e.g., growing crops and farm animals) to be reported at fair value less cost of disposal.GAAP generally requires these items to be recorded at cost.