If a business had spent $12 manufacturing 10 units, then $14 in manufacturing 20 units and sold 15 units, it estimates its cost of sales as being $190, or $120 plus $70. The two most popular methods are first-in, first-out and last-in, last-out, or FIFO and LIFO.įor example, FIFO assumes that the earliest acquired products are the earliest products to be sold. Since not all businesses can tell which specific products were sold and thus calculate cost of sales using their exact acquisition costs, most businesses use a method to estimate the cost of sales by using an assumption on which units were sold first. If the business manufactures its products, then the cost of sales per unit of its product includes the costs of labor, materials and manufacturing overhead spent on manufacturing it.Ĭalculate the cost of sales by multiplying the number of products sold by the costs incurred in their acquisition by the business. If the business purchases its products, the cost of sales per unit of its product is the cost spent to purchase that product. To make a proper estimation of Xtractor’s cost of sales, the amount of decrease of the LIFO reserve needs to be added to the cost of sales.Find the costs incurred by the business in either purchasing or manufacturing its products intended for sale. Further, since the company has been reporting a cost of sales lower than the actual replacement cost, due to price decreases, the company’s cost of sales has been underestimated. Since the prices of inventory have been decreasing, the LIFO reserve must have been decreasing as well. Subtract the amount of decrease of the LIFO reserve from the cost of goods sold.Add the amount of decrease of the LIFO reserve to the cost of goods sold.Add the amount of increase of the LIFO reserve to the cost of goods sold.To compare the gross profit of Xtractor with other companies reporting using FIFO, an analyst would need to: The price of production inputs within the company’s industry has been decreasing for the last few years. The inventory amount will have to be adjusted by adding the disclosed LIFO reserve to the inventory balance that is reported on the balance sheet. Subtract the disclosed LIFO reserve from the inventory balance.Multiply the inventory balance by the disclosed LIFO reserve.Add the disclosed LIFO reserve to the inventory balance.If a company uses the LIFO method, in converting the reported inventory amount to FIFO, the company has to: If the LIFO reserve decreases during a reporting period, the decrease in the reserve should be added to the cost of the sales amount which is reported on the income statement. The cost of sales figure should also be adjusted by subtracting the increase in the LIFO reserve during the period from the cost of sales amount reported on the income statement. To compare companies that use the LIFO method with other companies, the inventory amount has to be adjusted by adding the disclosed LIFO reserve to the inventory balance that is reported on the balance sheet. Conversion of Reported Financial Statements from LIFO to FIFO For example, the LIFO reserve disclosure enables adjustments to be made to the financial statements of a US company that uses the LIFO method, thereby making it comparable to a similar company that uses the FIFO method. The use of the LIFO reserve makes this possible. It is oftentimes necessary to compare the financial statements of companies that use LIFO to those of their counterparts that use FIFO.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |