Achievable CMA Part 1

1. External financial reporting decisions

1.2. Financial transactions

1.2.2. Inventory

Our CMA Part 1 course is currently in development and is a work-in-progress.

Learning outcomes

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The learning outcome statements related to inventories are as follows:

Identify issues in inventory valuation, including which goods to include, what costs to include, and which cost assumption to use
Identify and compare cost flow assumptions used in accounting for inventories
Demonstrate an understanding of the lower of cost or market rule for LIFO and the retail inventory method, and the lower of cost and net realizable value rule for all other inventory methods
Calculate the effect on income and on assets of using different inventory methods
Analyze the effects of inventory errors
Identify advantages and disadvantages of the different inventory methods
Recommend the inventory method and cost flow assumption that should be used for a company given a set of facts

Inventory Valuation Issues

Determining which goods and costs to include in inventory
Selecting appropriate cost flow assumption (e.g., FIFO, LIFO, weighted average)

Cost Flow Assumptions

FIFO: first-in, first-out
LIFO: last-in, first-out
Weighted average cost
Comparison of effects on financial statements

Lower of Cost or Market / Net Realizable Value Rules

LIFO & retail inventory: lower of cost or market (LCM) rule
Other methods: lower of cost and net realizable value (NRV) rule

Effects of Inventory Methods

Impact on income (COGS, gross profit)
Impact on assets (ending inventory valuation)

Inventory Errors

Effects on reported income and assets
Error correction implications

Advantages and Disadvantages of Inventory Methods

Tax implications
Income smoothing
Relevance to business environment

Recommending Inventory Methods

Assess company facts and circumstances
Match inventory method and cost flow assumption to business needs

Next | 1.2.2.2 Inventory ownership and capitalization

Learning outcomes

The learning outcome statements related to inventories are as follows:

Identify issues in inventory valuation, including which goods to include, what costs to include, and which cost assumption to use
Identify and compare cost flow assumptions used in accounting for inventories
Demonstrate an understanding of the lower of cost or market rule for LIFO and the retail inventory method, and the lower of cost and net realizable value rule for all other inventory methods
Calculate the effect on income and on assets of using different inventory methods
Analyze the effects of inventory errors
Identify advantages and disadvantages of the different inventory methods
Recommend the inventory method and cost flow assumption that should be used for a company given a set of facts

Key points

Inventory Valuation Issues

Determining which goods and costs to include in inventory
Selecting appropriate cost flow assumption (e.g., FIFO, LIFO, weighted average)

Cost Flow Assumptions

FIFO: first-in, first-out
LIFO: last-in, first-out
Weighted average cost
Comparison of effects on financial statements

Lower of Cost or Market / Net Realizable Value Rules

LIFO & retail inventory: lower of cost or market (LCM) rule
Other methods: lower of cost and net realizable value (NRV) rule

Effects of Inventory Methods

Impact on income (COGS, gross profit)
Impact on assets (ending inventory valuation)

Inventory Errors

Effects on reported income and assets
Error correction implications

Advantages and Disadvantages of Inventory Methods

Tax implications
Income smoothing
Relevance to business environment

Recommending Inventory Methods

Assess company facts and circumstances
Match inventory method and cost flow assumption to business needs

Learning outcomes

The learning outcome statements related to inventories are as follows:

Identify issues in inventory valuation, including which goods to include, what costs to include, and which cost assumption to use
Identify and compare cost flow assumptions used in accounting for inventories
Demonstrate an understanding of the lower of cost or market rule for LIFO and the retail inventory method, and the lower of cost and net realizable value rule for all other inventory methods
Calculate the effect on income and on assets of using different inventory methods
Analyze the effects of inventory errors
Identify advantages and disadvantages of the different inventory methods
Recommend the inventory method and cost flow assumption that should be used for a company given a set of facts

Inventory Valuation Issues

Determining which goods and costs to include in inventory
Selecting appropriate cost flow assumption (e.g., FIFO, LIFO, weighted average)

Cost Flow Assumptions

FIFO: first-in, first-out
LIFO: last-in, first-out
Weighted average cost
Comparison of effects on financial statements

Lower of Cost or Market / Net Realizable Value Rules

LIFO & retail inventory: lower of cost or market (LCM) rule
Other methods: lower of cost and net realizable value (NRV) rule

Effects of Inventory Methods

Impact on income (COGS, gross profit)
Impact on assets (ending inventory valuation)

Inventory Errors

Effects on reported income and assets
Error correction implications

Advantages and Disadvantages of Inventory Methods

Tax implications
Income smoothing
Relevance to business environment

Recommending Inventory Methods

Assess company facts and circumstances
Match inventory method and cost flow assumption to business needs

Learning outcomes

The learning outcome statements related to inventories are as follows:

Identify issues in inventory valuation, including which goods to include, what costs to include, and which cost assumption to use
Identify and compare cost flow assumptions used in accounting for inventories
Demonstrate an understanding of the lower of cost or market rule for LIFO and the retail inventory method, and the lower of cost and net realizable value rule for all other inventory methods
Calculate the effect on income and on assets of using different inventory methods
Analyze the effects of inventory errors
Identify advantages and disadvantages of the different inventory methods
Recommend the inventory method and cost flow assumption that should be used for a company given a set of facts

Key points

Inventory Valuation Issues

Determining which goods and costs to include in inventory
Selecting appropriate cost flow assumption (e.g., FIFO, LIFO, weighted average)

Cost Flow Assumptions

FIFO: first-in, first-out
LIFO: last-in, first-out
Weighted average cost
Comparison of effects on financial statements

Lower of Cost or Market / Net Realizable Value Rules

LIFO & retail inventory: lower of cost or market (LCM) rule
Other methods: lower of cost and net realizable value (NRV) rule

Effects of Inventory Methods

Impact on income (COGS, gross profit)
Impact on assets (ending inventory valuation)

Inventory Errors

Effects on reported income and assets
Error correction implications

Advantages and Disadvantages of Inventory Methods

Tax implications
Income smoothing
Relevance to business environment

Recommending Inventory Methods

Assess company facts and circumstances
Match inventory method and cost flow assumption to business needs