ACCOUNTING FOR MERCHANDISING OPERATIONS参考.ppt

The consistency principle requires a company to use the same accounting methods from period to period so that financial statements are comparable across periods. Companies can change accounting methods occasionally only for good reasons. When we report inventory on the balance sheet, we report it at the lower of cost or market value. Cost is determined using one of the methods we just discussed: Specific identification, FIFO, LIFO or weighted average. Market is defined as the current replacement price of the inventory. Reporting inventory at the lower of cost or market value follows the conservatism principle by not overstating the value of assets. We can apply the lower of cost or market concept on an individual item basis, for similar categories of inventory, or for the inventory as a whole. Here is some information on inventory items of a motor sports retailer. Take a few minutes and review this information. If we look at the individual items, we will select the lower of cost or market for each item in inventory. So, for the Roadster, we would select the market value of $140,000 because it is lower than cost of $160,000. Continuing down the chart, we would select the lower of cost or market for each item in inventory. At the end, we would use the total of $265,000 as the reported value of inventory. Take a few minutes and review this chart. It shows the impact of inventory errors on the income statement. For example, if Ending Inventory is understated, that will result in an overstatement of Cost of Goods Sold which will result in an understatement of Net Income. Take a few minutes and review this chart. It shows the impact of inventory errors on the balance sheet. As we just noted on the previous slide, if Ending Inventory is understated, Cost of Goods Sold will be overstated, which will result in an understatement of net income. An understatement of net income will result in an understatement of equity. Also, if Ending Inventory is understated, then as