Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SUMMARY OF LEARNING OBJECTIVES

1. Describe the steps in determining inventory quantities. The steps are: (1) take a physical inventory of goods on hand, and (2) determine the ownership of goods in transit or on consignment.
2. Explain the accounting for inventories and apply the inventory cost flow methods. The primary basis of accounting for inventories is cost. Cost of goods available for sale include (a) the cost of beginning inventory and (b) the cost of goods purchased. The inventory cost flow methods are: specific identification, and three assumed cost flow methods–FIFO, LIFO, and average cost.
3. Explain the financial effects of the inventory cost flow methods. Companies may allocate the cost of goods available for sale to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. These methods have different effects on financial statements during periods of changing prices. When prices are rising, the first-in, first-out method (FIFO) results in lower cost of goods sold and higher net income than the other methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, whereas the inventory under LIFO is the farthest from the current value. In a period of rising prices, LIFO results in the lowest income taxes.
4. Explain the lower-of-cost-or-market basis of accounting for inventories. Companies may use the lower-of-cost-or-market (LCM) basis when ...