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Cost Management
Home PDU for the PMP® / Technical

Inventory Cost Flow Assumption

USD 15.00
instructor
Instructor
Alan Fata
Category
Technical
Difficulty
Easy
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Course Highlight Curriculum Course Content Take The Test
Learning Objectives:
  1. Understand the reason that accounting rules are often standardized so that all companies report many events in the same manner.
  2. Know that the selection of a particular cost flow assumption is necessary when inventory is sold.
  3. Apply the following cost flow assumptions to determine reported balances for ending inventory and cost of goods sold: specific identification, FIFO, LIFO, and averaging.
  4. Appreciate that reported inventory and cost of goods sold numbers are not intended to be right or wrong but rather must conform to U.S. GAAP, which includes several different allowable cost flow assumptions.
  5. Recognize that three cost flow assumptions (FIFO, LIFO, and averaging) are particularly popular in the United States.
  6. Understand the meaning of the LIFO conformity rule and realize that use of LIFO in the U.S. largely stems from the presence of this tax rule.
  7. Know that U.S. companies prepare financial statements according to U.S. GAAP and their income tax returns based on the Internal Revenue Code so that significant differences often exist.
  8. Recognize that theoretical problems with LIFO have led the creators of IFRS rules to prohibit its use.
  9. Explain that the biggest problem associated with LIFO is an inventory balance that can often show costs from years (or even decades) earlier that are totally irrelevant today.
  10. Identify the cause of a LIFO liquidation and the reason that it is viewed as a theoretical concern by accountants.
  11. Merge a cost flow assumption (FIFO, LIFO, and averaging) with a method of monitoring inventory (periodic or perpetual) to arrive at six different systems for determining reported inventory figures.
  12. Understand that a cost flow assumption is only applied in computing the cost of ending inventory units in a periodic system but is used for each reclassification from inventory to cost of goods sold in a perpetual system.
  13. Calculate ending inventory and cost of goods sold under both a periodic and a perpetual FIFO system.
  14. Recognize that periodic and perpetual FIFO systems will arrive at identical account balances.
  15. Determine ending inventory and cost of goods sold using a periodic LIFO system.
  16. Monitor inventory on an ongoing basis through a perpetual LIFO system.
  17. Understand the reason that periodic LIFO and perpetual LIFO may arrive at different figures.
  18. Use a weighted average system to report ending inventory and cost of goods sold.
  19. Calculate inventory balances by applying a moving average inventory system.
  20. Use information found in footnote disclosure to convert LIFO balance sheet and income statement numbers into their FIFO or current cost equivalents.
  21. Compute a company’s gross profit percentage and explain the relevance of this figure.
  22. Calculate the average number of days that inventory is held and provide reasons why companies worry if this figure starts moving upward unexpectedly.
  23. Compute the inventory turnover and explain its meaning.

Other course details:
  1. This is an introductory course that does not require any prerequisite.
  2. This course can be taken on a standalone basis.
  3. This course is chapter 9 in the book titled "Financial Accounting".
  4. It provides 3 PDUs towards your PMP professional development education.
Course Features
Credits:
3 PDU
Skill Section:
Technical
Access:
Lifetime
Test Questions:
23
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