INFO. FOR BUSINESS DECISIONS - ACTG. 011 - WINTER 2006Slide12-1

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Session 12Inventories
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Inventory Components

• Material
• Labor
• Overhead

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Inventory Categories

• Raw Materials
• Work in Process (WIP)
• Finished Goods

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Manufacturing Cost Flows
PL
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Key Inventory Issues

• Acquisition costs
• Carrying methods
• Cost flow assumption
• Valuation

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Inventory Acquisition

• What units
• What costs

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Cost Basis

• Sacrifice to put into use
• Components
• Net price
• Freight
• Production
• Preparation
• Fees
• Key point.....future benefit

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Inventory Methods

• Perpetual
• B I - O E
• Periodic
• B I - E O

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Cost Flow Assumption

• Specific ID
• Averaging
• FIFOfirst in first out
• LIFOlast in first out
• Applies to costs only, NOT physical movement
• Disclose both values
• Use same method for book and tax

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Management and LIFO

• Use in periods of rising prices
• Tax advantages
• Will lower reported profits, so consider bonus
  impact

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Inventory Valuation

• Lower of Cost or Market
• Obsolescence
• Slow moving items

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Inventory Analysis

• Inventory turnover or turns
• COGS / Average ending inventory
• Days in inventory
• Ending inventory / Avg. Daily COGS

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Finding Financial Info

• Accounts receivablepage 310
• Inventorypage 370