Scribd
Upload
4 views

Chapter 7 White Board Notes Key Topics SUMMARY REVIEW (use this one)

Chapter 7 discusses the Cost of Goods Sold model, emphasizing its use in the Periodic Method and its applicability to FIFO, LIFO, and average cost techniques. It explains the purpose and computation of the LIFO Reserve, including the LIFO Effect and necessary journal entries. Additionally, it covers the purpose and computation of $ Value LIFO to prevent liquidation of LIFO layers during periods of rising prices.

Uploaded by

jennyhienhuynh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
4 views

Chapter 7 White Board Notes Key Topics SUMMARY REVIEW (use this one)

Chapter 7 discusses the Cost of Goods Sold model, emphasizing its use in the Periodic Method and its applicability to FIFO, LIFO, and average cost techniques. It explains the purpose and computation of the LIFO Reserve, including the LIFO Effect and necessary journal entries. Additionally, it covers the purpose and computation of $ Value LIFO to prevent liquidation of LIFO layers during periods of rising prices.

Uploaded by

jennyhienhuynh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 1

ACCT 5110

WHITE BOARD NOTES


CHAPTER 7 REVIEW: KEY TOPICS

Cost of Goods Sold Model Analytical format used extensively in Ch. 7 but
Beginning inventory only for the Periodic Method – it is not needed for
+ Purchases_________________ the Perpetual Method other than to validate the
Cost of goods available for sale inventory count for audit purposes – to accomplish
our two inventory costing objectives (to determine
- Ending inventory___________
COGS and the EI balance). The format is applicable
= Cost of goods sold
to all three major inventory costing techniques:
FIFO, LIFO, and average cost.

Purpose of the LIFO Reserve:

To provide the capability to compare companies when one company uses LIFO
and the other FIFO. See discussion in Kieso, p. 7-24.

LIFO Reserve: Steps to Compute and Report

1. LIFO Reserve = FIFO EI $ (-) LIFO EI $

2. LIFO Reserve is tracked in the Allowance to Reduce Inventory to LIFO


account, a contra asset account.

3. The change in the LIFO Reserve from one period to the next is known
as the LIFO Effect.

4. LIFO Effect = Dec. 31 LIFO Reserve (-) Jan. 01 LIFO Reserve

5. JE to reduce Inventory to LIFO based on LIFO Effect:

Dr, Cost of Goods Sold (Income Stmt.)

Cr, Allowance to Reduce Inventory to LIFO (Balance Sheet)


(EI = Ending Inventory)

Purpose of $ Value LIFO:


To reduce the potential for liquidating LIFO layers. If liquidation occurs, it may
defeat LIFO’s main purpose (tax reduction) in periods of rising pricing. (See the
first three paragraphs of the Dollar-Value LIFO section in Kieso, pp. 7-27 and 7-
28.) Also see: Ch. 7C White Board Notes Go Back Dollar Value LIFO.

$ Value LIFO: Steps to Compute

1. Convert EI (of a subsequent year) to base-year prices

2. Subtract EI @ base-year prices from base-year EI, yielding the inventory


layer added during that year

3. Multiply this additional inventory layer times the CY price index

4. Add the incremental price-level adjusted inventory layers for all prior
years to the base-year inventory, yielding $ Value LIFO Total EI

(EI = Ending Inventory)

You might also like