Inventory Lifo and complications - YouTube

If hello class our discussion about inventories will focus primarily on LIFO and some other

inventory complications

for these are the things that you didn't get to in accounting 101

so first of all life so they sent member is not allowed under IFRS or International Financial reporting standards

US gaap is the only place that is currently allowed

requires extra work and disclosure of things you must disclose is a lifo reserve LIFO reserve is the difference between

your inventory calculated using LIFO in your inventories calculated using fifo

so that means you essentially have to have your inventoried on both ways twice as much work

roughly To give you an idea what the

disclosure might look like this is a footnote from Exxon Mobil and you can see

that

right here they talked of the aggregate replacement cost of inventories estimated see

our life also replacement cost is another way of saying FIFO because

it is the most recent

things that are in your inventories

of what you just replaced of and the old stuff is what you sold that's the assumption that see exceed by 8.1 billion and 4.5 billion

on those two dates so their lifo reserve for 2016

was 8.1 billion and for 2015 to 4.5 billion so the difference between those two of which finished two years is

would have gone to cost of goods sold so you'd see that the significant since their

income by itself was only

about 10 billion so that

difference error of 4 billion that is significant difference in their income

to the problems LIFO is that it creates what we call layers of meaning each year as you add to your inventories that year create some layer

and if prices are rising star general assumption each layer is little more expensive than a layers previous

what

gaap is worried about is that we would create how to make lifo liquidation what that means is that

as long as you're adding to your inventory you are adding layers of any year that you reduce your

inventory you're going to peel back layers are going to have a liquidation

and that can sometimes be accomplished on a temporary basis meaning in a year in just over

much of your inventory and therefore your inventory drops

at the end of the yer and in January you start ordering again and bring it back up that will be considered a temporary

liquidation of

gas as that 1 May have a temporary liquidation we ignore it because that will distort our income

because what we're selling and those of earlier layers is less expensive items from way back when we first started

and so what we we don't want that to distort our income and to make a better so if the liquidations is going to

temporary If it is permanent go ahead and do that mean we're going to

are a long-term basis reduce our inventories to two more efficient levels that's one thing

but if we are going to rebuy that inventories and bring it back up to a more

normal level or even even increase that we can we were treated as if that

the liquidation did not happen

so retail method - there is as an explanation that I've put a desire to learn us actually simpler way track everything with a retail price

of because as easily seen and then you have to just for cost for your balance sheet You can follow along example however usually this is

combined with

LIFO and so the example they use in the reading

are uses beginning inventories in calculating your cost and retail

if you truly use LIFO

in connection with the retail method and you would not use the beginning inventories at

cost and retail in your calculations you would start with the purchases

and go from there instead of all of the fact is you truly LIFO

so inventory shrinkage and actually usually think of things that are stolen things they get broken that's easily account for user

inventories and are debit the cost of goods sold typically

Obsolete inventory much more of a judgment call and needs some of guidance the

half to identify - typically we do so by looking at reports that show us inventory

it's not selling of you might call a slow moving inventories

are then we must adjust or look at the possibility just into lower of cost or market

now the market value of our inventories now to find a new U.S. GAAP as one choice net realizable value

which is the estimated selling price by selling costs you do not have any other choices like they used to be just met realizable value see

figure out at reliable I you compare that to the cost originally paid for it

and you apply the lore of those two

you can apply that each individual items you can buy two groups we can apply to the whole inventories wants

that does not specify which one

items is the most conservative hole with a whole is going to sell them result in any adjustment

most companies probably use the medal round and do it by groups our homework examples

will do a byte individual items just because the data we have

of sports that much more easily than the other two ago and get the idea

this applies even stop we had not read receipt for instance if you have agreed to buy inventories at a particular price

are in the future have actually ordered a actually got Reese seed oil every but you have a firm

commitment this as I'm going to buy a can of these each month

for the next two years and this is the cost

if that's the case and the value of the price in a market of talk about things that are of more like

commodities like this could be like reader or some

worry or something and you have a commitment by that and the price drops below what your commitment is

you actually have to record that lost because you're going to pay more than it is worth disaster from Edna

that needs to court and even though you have receded yet

so when the price changes

are at once you have recall figured out that that realizable value

and compare it to the cost of the inventoried take a difference that is you're lost we're going

to get the cost of goods sold most of the time businesses

part of our business

model and make credit either allowance or credit inventories

paying on what's easiest for the record keeping once you have lowered that inventoried down to its

net realizable value there is no reversal meaning if the value goes back out something changes again

there is no recall rid of that walks in U.S. gap Valentine recovery is allowed under Ivers by the way

right dollar value life all there is an explanation that will help you with us and give you some examples

won two of

three agro purple items as one this makes rather than individual items of inventories reduces liquidations so the big issue is what you

include a pool of wrinkles you have you can use one poll for all your inventories and you have a

lot fewer of liquidation issues of it would be relatively straightforward in your accounting

of your diet challenge by auditors and by the IRS has to all that

how you apply that so most companies are gonna have to choose multiple pools of different of

items that are similar so you might have a pool them and Torretta is cloning if you're Wal-Mart and one that's for individual Omar and today

so what you're going to do isn't just for inflation typically many years and Axtell measure of

inflation low prices are changing in the marketplace

are you could use an internal based on your pricing how much you raise your prices and typically you're going to have better of you'll feel

more bit like you got information is there a file of use and textural measure

and so what you do is adjust for inflation use to provided by the inflation rate one plus of inflation rate

in order to strip on inflation bank and found error

your amatory applet that inflation to what the beginning and tort laws if you're adding

inventories after taking out of a nation is higher than year beginning inventorying without inflation

than you have a new layer and that later than is considered a layer for that year and you won't apply that layer by the inflation rate

just that layer so you have adjusted the underlying layers back to the original cost and then you

apply it inflation only the inflation rate only the amount you added that year

at the