Financial Accounting: Tools for Business Decision Making, 7th Edition

CHAPTER 6

REPORTING AND ANALYZING INVENTORY

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Determine how to classify inventory and inventory quantities.
2. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
3. Explain the financial statement and tax effects of each of the inventory cost flow assumptions.
4. Explain the lower-of-cost-or-market basis of accounting for inventories.
5. Compute and interpret the inventory turnover.
6. Describe the LIFO reserve and explain its importance for comparing results of different companies.

Feature Story

“WHERE IS THAT SPARE BULLDOZER BLADE?”

Let's talk inventory—big, bulldozer-size inventory. Caterpillar Inc. is the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. It sells its products in over 200 countries, making it one of the most successful U.S. exporters. More than 70% of its productive assets are located domestically, and nearly 50% of its sales are foreign.

In the past, ...