2 Inventory Flashcards
Inventory
Costs included / NOT included
Included
- purchase returns: contra account to purchases
- freight-in
- sales tax on inventory purchases
- packaging costs
- insurance on transit
NOT included
- freight out
- interest on purchase (cost of financing)
Inventory
JE: Purchases / CoGS
- periodic
- perpetual
Periodic
Purchases
(dr) Purchases
(cr) Cash/Acc Pay
Year end
(dr) Ending Inventory
(dr) CoGS (year-end plug)
(cr) Beg Inventory
(cr) Purchases
Perpetual
Purchases
(dr) Inventory
(cr) Cash/Acc Payable
Sale: COGS recorded at time of sale
(dr) Cash or A/R
(cr) Sales
(dr) CoGS
(cr) Inventory
Net Purchases
(calculation)
Gross Purchases
+ Transportation (freight in)
– Purchase returns/allowances
– Purchase Discounts
= Net Purchases
Cost Flow Assumptions
Compare FIFO vs LIFO
FIFO
Pro
- flow of costs = flow of physical goods
- BS value of inventory –> approximates current cost (more relevant than HC)
Con
- I/S matching rev/exp –> not ideal b/c often rev = current year, CoGS exp = prior period
- Phantom/illusory profits: lower CoGS (prior period) = more income, but NOT disposable income b/c nec next period when prices higher
LIFO
Pro
- I/S matching rev/exp –> both current year
- Less phantom/illusory profits
- Income tax advantage
- Rising prices = higher CoGS / lower tax burden
- Must also use for books if use for tax
Con
- BS value inventory: less ideal b/c valued at “oldest” prices, less match to current cost
-
LIFO liquidation: when # units sold > units purchased/produced
- move to a lower priced invenotry
- From poor planning or lack of supply
- Want to avoid b/c removes benefits of LIFO (lower NI, lower tax, matching Rev/Exp
Dollar Value LIFO
- def
- calc
Why use Dollar Value LIFO:
- using pools of inventory, NOT tracking indiv purch/sales
- Permits using FIFO internally* (mgt reports), but *LIFO external reporting
- Provides efficiencies: reduces clerical costs, likelihood of liquid layer
- Inventory pools: group similary items into pools an use a price index to determine LIFO layer added in currenty year
- Essentially a measure of inflation
Calculation
- Index = end-Inv @current - end-Inv @base
- convert end-Inv @ current –> base
= end-I @curr / index
- find layer @ base
= end-I @base - beg-I @base
- covert layer to current
= layer @base * index
- end-I @current
= beg-Inv @base + layer @ current
Other methods of estimating ending Inventory / CoGS
- gross margin (gross profit)
- on sales
- on cost
- relative sales method (basket purchase)
- retail inventory method
Gross margin method
- uses historical gross profit rates on sales or cost
Cost + Profit Margin = Sales
- given gross profit on sales –> set sales to 100%
- = gross margin
- = gross profit / sales
- given gross profit on cost –> set cost to 100%
- = gross profit / cost
Inventory
Relative Sales Method
Allocates initial cost in a basket purchase
- Sometimes multiple invenotry items are purchased together at a significant discount
- Inventory value is allocated to indiv items based on relative selling price
inventory cost
= (item selling price / total selling prices) * basket purchse price
Retail Inventory Method
what/why
basic calculation
- Used to estimate cost of ending inventory (End-Inv @cost)
- b/c often stored at retail prices
basic calculations
- cost/retail ratio = AFS @cost / AFS @retail
- end-Inv @cost = end-Inv @retail * c/r ratio
- CoGS = AFS @cost - end-Inv @cost
original selling price
cost + initial markup
net additional markups
net markdowns
net additional markups: net increase in original selling price
= markups – additional markup cancellations
- Markup cancellation: reduction of additional markup, NOT reduction below original selling price
Net markdowns: net decrease in original selling price
= markdowns (reductions in original selling price) – markdown cancellations
- Markdown cancellations: reduction of original markdown, NOT increase above original selling price
2 types Shortage
- Normal shortage (spoilage):
- Abnormal shortage( losses): amt of merchandise avail for sale haas declined, usually recoverable through insurance
Retail Inventory
variations
FIFO
- ratio only uses current period purchases
- assumes all beg-Inv will be sold, and end Inv only current purchases
- includes
- Net markups
- Net markdowns
FIFO, LC-M
- same as FIFO
- ONLY includes net markups
- NO net markdowns -> more conservatibe
- give larger denom –> smaller ratio –> End-Inv small
Average
- includes both beg-Inv AND current period purchases
- includes both net markup/net markdown
Average, LC-M = conventional retail inventory method
- same as avg
- excludes net markdown
- only use net markup
DV LIFO
- DV LIFO applied to End-Inv @ retail
- determine current yr layer @cost-retail
- convert to current yr layer @ current-retail
- add layer to beg-Inv @retail –> end-Inv @retail
- Retail method:
- Calculate cost/retail ratio
- Apply ratio to DV LIFO end-Inv @retail
- –> end-Inv @cost
Decline in Inventory value
write down - general
- write down if value inventory < cost
- Amount of write-down depends on value used for subsequent measurement
- immeidate recognition of a loss
- No write back up
Inventory
2 methods for subsequent valuation
- how
- Journal entries
Lower cost or net realizable value:
- Used for FIFO or Wtd Avg
- determine if write down nec
- If cost < NRV –> no write down
- If cost > NRV –> write down to NRV
-
Net realizable value = selling price – costs:
- to ship
- complete
- dispose
- write down
(dr) Loss on Inventory Impairment
(cr) Inventory
lower cost or market:
- Used for LIFO or Retail methods
- determine if devalued
- uses 3 values
- replacement cost
- net realizable value = ceiling
- floor = NRV - profit margin
- select market value = middle of 3 (above)
- uses 3 values
- if cost > market value –> write off
- Journal entry
direct method
(dr) Cost of Goods Sold
(cr) Inventory
allowance method
(dr) Holding loss
(cr) Allowance to reduce inventory to LC-M
