Intermediate Accounting, 15th Edition

CHAPTER 8 Valuation of Inventories: A Cost-Basis Approach

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Identify major classifications of inventory.
2. Distinguish between perpetual and periodic inventory systems.
3. Determine the goods included in inventory and the effects of inventory errors on the financial statements.
4. Understand the items to include as inventory cost.
5. Describe and compare the cost flow assumptions used to account for inventories.
6. Explain the significance and use of a LIFO reserve.
7. Understand the effect of LIFO liquidations.
8. Explain the dollar-value LIFO method.
9. Identify the major advantages and disadvantages of LIFO.
10. Understand why companies select given inventory methods.

To Switch or Not to Switch

Many companies use the last-in, first-out (LIFO) cost flow assumption in the accounting for inventories. LIFO has a lot going for it in terms of tax savings and providing an income number that better reflects the gross profit associated with inventories with different historical costs. However, in the wake of international convergence discussions (LIFO is not permitted under IFRS) and tax policy debates (LIFO is one of a number of “tax loopholes” that if closed could help address our budget and deficit challenges), more companies are seriously considering the switch from LIFO to first-in, first-out (FIFO) or average-cost inventory methods. For example, of the 449 large public companies surveyed by the AICPA in 2012, just 163 indicated LIFO ...