Study Guides (238,524)
Canada (115,195)
York University (9,816)
Accounting (97)
ACTG 2011 (17)
all (2)


15 Pages
Unlock Document

York University
ACTG 2011

ACTG 2011 MIDTERM NOTES (CHAPTER 7 CHAPTER 9) CHAPTER 7 Definition of inventory Goods available for sale (finished goods) Goods available for production (raw materials, WIP, materials used in supplying service- which are expensed when revenue is recognized) IFRS states that exclusions of overheard are: storage, administration costs, selling and marketing, and waste ASPE doesnt have to include overhead costs overhead costs can be expensed instead minimize taxes Inventory Systems (choice b/w system is an internal control issue) Perpetual o @ purchase of inventory: Dr. Inventory Cr. Cash o @ sale Dr. Cash or A/R Cr. Revenue Dr. COGS Cr. Inventory Periodic o @ purchase of inventory: Dr. Purchases Cr. Cash o @ sale Dr. Cash Cr. Revenue o @ end of the period (adjusting entry) Dr. COGS [= BI + Purchases EI) Dr. Inventory [Purchases COGS] Cr. Purchases o Purchases is an expense account; purchases arent recognized as revenue (but at end of period its all the same) o Cost of stolen items automatically included in COGS; weakness b/c cant tell if theres a problem with theft Pose internal control issues: need to count inventory; have security procedures, segregation of duties so that managers can fulfill stewardship responsibilities; if not theft: miscount, lost, misplaced When overload of storage: can signify impairment recommend LCM cost IFRS Cost Formulas Determine the value of ending inventory and COGS @ period end Method that yield higher COGS will lower NI and lower income before tax (will have smaller cash outflow b/c less taxes will have to be paid) Affect COGS and INVENTORY allocation, which change financial statements FIFO o Best for: predicting future cash flows Gives most current indication of what it would cost to replace the inventory at current prices (b/c costs of inventory on B/S are most current associated with inventory purchased most recently) When prices are rising: EI higher than avg. cost b/c COGS would be lower current ratio higher o When prices are rising: overestimates future profitability (maximizes NI) o Flow of costs correspond w/ physical flow of goods approximates specific identification method (matching) Average Cost o Best for: predicting future profitability by giving most current COGS (on I/S) Better indication of gross margin, net income Future profitability based on: what inventory will cost in the future o Yields lower NI than FIFO when prices are rising (good for tax minimizing objectives) Specific Identification (only can be manipulated) o If there are identical items with different costs, manager can match it to the item with the highest cost to increase COGS (aka expenses) and lower NI tax minimization; or vice-versa o Required by IFRS when units of inventory arent interchangeable Rising EI Current Current Total Liabilities COGS NI prices ratio assets assets FIFO Higher Higher Higher Higher No effect Lower Higher Avg. Lower Lower Lower Lower No effect Higher Lower Cost Lower of Cost and Market Rule @ NRV (net realizable value) rule exists b/c of the principle of conservatism o conservatism choices in current period can result in opposite effects in later periods (write-ups) writedown in TWO WAYS: o Dr. Cost of Sales (expenses +) Cr. Inventory o Dr. Inventory Loss (expenses +) Cr. Inventory Writedowns reduce net income Valuing Inventory at Market Value (not permissible under IFRS unless agriculture, forest products, refined nat. resources b/c NI would be overstated) @ NRV or REPLACEMENT COST (on date of B/S) recognizes gains and losses before inventory is sold o gain on balance sheet (inventory) and gain on I/S (holding gain) info about holding gains/losses helps stakeholders assess how well inventory is being managed and predict future cash flows o valuing @ NRV gives idea of amount of cash that will be realized by sale of inventory good approach when selling rice is known b/c ther is a contract to sell inventory or if theres a market that guarantees ability to sale (ie. Gold and oil) Dr. Inventory Cr. Holding Gain Inventory and Taxes CRA requires that cost formula used for financial reporting = tax reporting (must use method that best reflects matching costs to revenues) o Explanation of why you cant use LIFO (CRA disallows it) Ratios/Formulas Affected Inventory Turnover Ratio = COGS/ Average Inventory Days of Inventory on Hand = 365/ITO Current ratio = Current Assets/ Current Liabilities Gross Margin Percentage = Gross Margin/ Sales
More Less

Related notes for ACTG 2011

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.