2C Inventory Flashcards
Product costs (capitalized to inventory)
Inventory \+ import duties \+ freight-in \+ storage \+ insurance
Cost of goods sold calculation
Beginning Inventory \+ cost of goods purchased \_\_\_\_\_\_\_\_\_\_\_\_\_ Cost of goods available for sale - Ending Inventory \_\_\_\_\_\_\_\_\_\_\_\_\_ Cost of goods sold
Cost of goods purchased calculation
Gross purchases - discounts - returns and allowances \_\_\_\_\_\_\_\_\_\_\_ Net purchases \+ freight-in or transportation-in \_\_\_\_\_\_\_\_\_\_\_ Cost of goods purchased
Period costs (expensed)
selling and administrative costs
Freight-out
Perpetual inventory system
updates are made in real time for each purchase and sale
Periodic inventory system
updates are made by counting the ending inventory at the end of a period to determine how much was sold.
Perpetual inventory entries
Dr - Inventory
Cr - AP
to record purchase
Dr - AR
Cr - Sales
to record sales
Dr - Cost of good sold
Cr - Inventory
to transfer inventory to cogs
Periodic inventory entries
Dr - Purchases
Cr - AP
to record purchase
Dr - AR
Cr - Sales
to record sales
No entry is made to cost of goods sold. Use cost of goods sold calculation.
Variance between inventory record and physical count (perpetual)
debit Inventory over and short to write down, credit to write up. Use Inventory as offset.
FOB shipping point (or FOB)
Included in inventory at the time it is shipped by the seller.
FOB destination
Included in inventory once it reaches the buyer
Consignment
Goods held in consignment are still included in the consignor’s inventory
Consignor entry
Dr - AR
Dr - Commission expense
Cr - Consignment sales
to record consignment sales less commission
Consignee entry
Dr - Cash
Cr - Commissions earned
Cr - AP
to record consignment sale
Weighted average
Periodic method (calculated at the end of the period)
Moving average
Perpetual method (calculated after each purchase)
Average cost of inventory calculation
Total cost/total units = cost per unit
cost per unit * units left = ending inventory
cost per unit * units sold = cost of good sold
FIFO
- COGS will be lower
- Tends to produce higher gross profit
- Will produce same ending inventory regardless of periodic vs perpetual
- offers the best valuation of ending inventory
LIFO
- COGS will be higher
- tends to produce lower gross profit
- offers the best matching on income statement
- Prohibited under IFRS
Dollar-value LIFO
Step 1 - Calculate base year increase
(ending inventory at year end / conversion price index = inventory at base year prices)
Step 2 - Calculate each year’s layer
(change in base year prices x conversion price index = ending inventory at dollar value LIFO cost)
LCNRV
NRV = Selling price less costs of completion, disposal and transportation (compare to cost)
Impairment on inventory
If NRV is lower than the cost, inventory is impaired.
LCNRV JE’s
Periodic:
loss on write down of inventory (expense)
Inventory (asset)
Perpetual:
loss on write down of inventory
Inventory (cost of goods sold)
Lower of cost or market (LCM)
Only for LIFO
Take the lower of cost or replacement cost and determine if it falls between ceiling and floor.
Ceiling = NRV (selling price less cost of disposal) Floor = Ceiling less normal profit margin
Once inventory is written down, it cannot be recovered under GAAP
