Inventory valuation is one of the factors that decision makers have to consider before making any decision in their business. They can know how different inventory assumptions affect the cost of good sold and the resulting net income. Inventory valuation is value a company allocates to its inventory in storage and when it is sold. There are several methods to calculate the inventory values to know how much they cost. These methods are specific identification, cost average, first in, first out (FIFO), and last in, first out (LIFO). Each method has its own advantages and disadvantages. Some of these methods are allowed under the generally accepted accounting principles (GAAP), while others are allowed by the international financial reporting standards (IFRS). This paper is going to highlight what each method means and the positive and negative impacts of using each method. Also, this paper will touch on why different companies prefer to use different methods when valuing inventory. The LIFO liquidation problem will be mentioned to help companies to know what the consequences of using the LIFO method will be. In addition, the dollar-value LIFO method will be discussed to help companies to alleviate the LIFO liquidation problem. Throughout this paper, the model of certainty and GAAP versus IFRS perspectives about inventory will be discussed.
The first method that is used to value inventory is the specific identification method. It is an inventory valuation method that is used by companies that sell large items such as pianos and cars. Through this method, merchandising companies are able to identify which specific individual units are sold and which are still waiting in the ending inventory. In other words, companies can keep track o...
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...d average cost, specific identification, first in, first out (FIFO), and last in, first out (LIFO) methods. Each method has its own advantages and disadvantages. Companies should know the positive and the negative impacts on the inventory if they select one of the methods rather than other methods. In addition, some of the methods are allowed to use under the generally accepted accounting principles (GAAP) while others are banned under the international financial reporting standards (IFRS). Companies also should be carful when they use the LIFO method during the inflection period because it causes the LIFO liquidation problem. There is a method that called the dollar-value LIFO method which is used to alleviate the problem. Moreover, the model of certainty was discussed in this paper. In the future, I think all companies in the world will follow unified principles.
As a retailer and a supplier, Sobeys has an extremely large balance in their inventory account. During 2015, the inventories are more than 50% of the total current assets, and 13% of the total assets. We will compare the inventory accounts of 100 randomly chosen locations out of the 258 locations, as well as the 3 Cash & Carry stores. The company’s main portion of the total inventories would be food related, and they have certain shelf lives. If the unsold inventories are sitting in the warehouse for too long, then the inventory will be unable to sell, and this brings risk to future revenues. So the company should monitor the entire food related inventory, and strictly follow the FIFO rule. We need to compare the average inventory on hand ratio to other competitors in the same industry to find out if the inventory control has serious issues. Also, inquire inventory evaluation at the warehouses and possibly observe a test count done by
In the second year of business at Golf Challenge Corporation the company is struggling. The cost of their inventory is rising, and they are in grave danger of losing their bank loan (their prime source of financing) due to not meeting the required financial ratios agreed and set forth by the bank at the time the loan was given. The owner comes up with a solution, and figures that instead of using Last in-First out (LIFO) the company can use First in-First Out inventory cost system (FIFO) and meet their required financial ratios set forth by the bank. Ultimately, Golf Challenge Corporation should not submit documents to the bank using FIFO as opposed to their previous system LIFO in order to meet the bank requirements
In order for Jim Turin & Sons, Inc to have used this method of accounting it would have had to match the cost of the merchandise with the revenue earned from the sale. Using the matching of revenue and cost the company would have had to have kept an actual inventory and maintained records of the costs associated with said inventory. Since the costs are not immediately deducted under the accrual method they are deferred to the year when the merchandise is
...ory holding costs, ordering costs, and shortage costs, and have a classification system for inventory items.
As part of the calculation for cost of goods sold it is necessary to determine the value of goods on hand, termed merchandise inventory. Accountants use two basic methods for determining the amount of merchandise inventory. Identify the two methods and describe the circumstances (including examples of users of each method) under which each method would be used.
Target's stock framework and the related expense of offers are represented under the retail stock bookkeeping system (RIM). Since a physical stock is taken just quarterly or once a year, Target utilizes the rearward in, first out (LIFO) system. The stock is expressed at the lower of LIFO cost or business importance if the expense of the supplanting stock is lower than its recorded buy cost, this technique is utilized
Also, please take into consideration how these reports are completed. These reports essentially summarize the cost of production activity with a specific reporting period and is a formalized summary of the four main steps that accounting uses to assign a fixed cost to units that are in and out in the final work-in-progress(WIP) inventory, which is inventory that is partially completed(Kimmel, et.al., 2017). In order for accounting to prepare its balance sheet, it is necessary to utilize these four steps to ensure that the production cost report reflects accurate data on inventory(Accounting Coach, 2017). The steps that were performed in creating this report were as
Their inventories are purchased both domestically and foreign. The company’s inventories consist of current assets reported in descending order of liquidity. The current assets that they consist of are ; cash and cash equivalents, accounts receivable, inventories and other current assets. The method that the company uses to count inventories is LIFO in perpetual method. LIFO method is last in, which is used to dispense cost to the cost of goods based on the link with the last inventory. As for the first out meaning the beginning inventory of that period will be dispensed to the ending inventory value (8.2 Choosing an accounting
Explain the trade-off between carrying costs and reorder costs, and compute the economic order quantity for a firm’s inventory orders.
When it comes to inventories, there are many significant difference between reporting standards. US GAAP allows companies to use the LIFO, FIFO or weighted average cost method (ASC 330-10-30-9). IFRS prohibits the use of using the LIFO cost method. This is because using LIFO will increase the COGS therefore decreasing your net profit which, ultimately, reduces the amount of tax a company pays. You can, however, use the FIFO or weighted average cost method (IAS 2
Since Wal-Mart Inc. consists of three different operating divisions; Wal-Mart Stores US, Wal-Mart International, and Sam’s Club, each division has its own method of inventory that they follow. The inventory method that Wal-Mart employed in the US is LIFO or Last in, First Out, which consists of the latest, or newest inventory to be sold first. The company also states that it evaluates its inventory based on the retail method of accounting, by considering the lower of cost or market. Walmart International however, has employed the First In, First Out or FIFO method, where the inventory that has been developed first, is therefore sold first, and Sam’s Club employed the Weighted Average Cost method using LIFO. In terms of LIFO reserve, Wal-Mart clearly states that its inventories which are valued at the LIFO method, ”approximate those inventories as if they were valued at FIFO.” as of January 31, 2013 and 2012.
The just-in-time (JIT) inventory system was developed in Japan after World War II, in an effort to control costs during fiscally challenging economic times (Waguespack and Cantor, 1996). The challenge that faced many Japanese companies in the post-War era was to find a way to meet the needs of customers and businesses while utilizing as few resources and as little capital as possible. The Japanese developed these set of techniques in order to control production, limit unnecessary products and reinvest the valuable capital left from the savings back into the business structure (Waguespack and Cantor, 1996). Much of the success of many Japanese corporations over the past four or five decades has been was linked to the principles of JIT (Chhikara and Weiss, 1995).
Term “marginal” is extensively used and known with reference to the economics which means “extra”, whereas with economic view point the marginal cost is the cost of producing every extra unit; however the accounting terminology of “marginal” defines the cost incurred on production other than its fixed cost is the marginal cost. Simply, none of the technique is applied unless it serves the benefits and the marginal costing is used by the firms for its registered benefits. Among all its benefits the primary advantage it serves is its attempt to distinguish the fixed and variable costs, and the method only considers the related variable costs to be included in production cost and the fixed costs are thus later deducted out for ascertaining net profit. The inventory at the year-end is also valued on the bases of variable cost. With all these beneficial characteristics of the said system firms using marginal costing are clearly aware of its ...
Introduction: EOQ model are used as a decision making tool for the control of inventory. In classical inventory models the demand rate is assumed to be constant or time- dependent. The EOQ model assumes the retailer’s must be paid for the items as soon as the items are received. However, the supplier will offer the retailer’s delay period in paying for the amount of purchasing cost. Before the end of this period, the buyer can sell the items and accumulate revenue and earn interest. A higher interest is charged if the payment is not settled by the end of permissible delay period.
Inventory management is a method through, which a business handles tangible resources and materials to ensure availability of resources for use. It is a collection of interdisciplinary processes including a full circle from the demand forecasting, supply chain management, inventory control and reverse logistics. Inventory management is the optimization of inventories of manufactured goods, work in progress, and raw materials. According to Doucette (2001) inventory management can be challenging at times; however, the need for effective inventory management is largely seeing more as a necessity than a mere trend when customer satisfaction and service have become a prime reason for a business to stand apart from its competition. For example, Wal-Mart’s inventory management is one of the biggest contributors to the success of the company;