6 Inventories & Cost of Goods Sold

Question 1

What are inventories?

Answer 1

Assets held for SALE in ORDINARY course of business (for sale - inventory. not for sale - PPE)

• Finished goods, semi-finished goods, raw materials

Valued at lower of costs or NRV (record lower of 2 in B/S)

Question 2

2 Inventory recording methods

Answer 2

Perpetural inventory system - continually update. can find COGS (income statement) & ending inventory (B/S)

Periodic inventory system - physical count at year-end

Question 3

Formula for COGS

Answer 3

COGS = Beginning inv + purchases - ending inv

Question 4

3 inventory cost flow assumptions

Answer 4

1. Specific identification - esp for products of high value
2. FIFO
   -COGS in income statement will include OLDEST costs
   -ENDING INV IN b/s will include most RECENT costs

Dr Acc receivable 300 (newest transaction)
Cr Sales 300

Dr COGS 100 (oldest)
Cr Inventory 100

3. Weighted-average
   ^same but for COGS & Inventory, calc using weighted avg price

Question 5

What is NRV (Net Realisable Value)?

Answer 5

(All estimated) Selling price - costs of completion - costs to make sales

Inventories usuallly recorded at costs. Only use NRV when inventories estimated to be lower than costs (record lower of costs/NRV)

Question 6

Impact of Inventory Errors (Same side Same effect model)

Answer 6

Increase/ decrease the same ways for:

Beg Inv, Purchases, COGS

Ending inv, Income

Question 7

Overstating value of ending inv will _ COGS and thus _ gross profit and net income

Answer 7

Overstating value of ending inv will UNDERSTATE COGS and thus OVERSTATE gross profit and net income

Question 8

Formula for Gross Profit Margin

Answer 8

Gross Profit Margin = Gross Profit/ Net sales

Gross profit = Revenue - COGS

High - higher markup - shows premium on quality product, efficiency in manufacturing

Low - price competition, inefficiency

Question 9

Formula for inventory turnover?

Answer 9

Inventory turnover = COGS/ Average inventory

Higher - greater efficiency (sold more frequently)

Question 10

Formula for average holding period

Answer 10

Average holding period = 365 / inventory turnover

Lower better (avg days to convert inventory into sales)

Question 11

Perpetual vs Periodic Journal entries

Answer 11

PERPETUAL: INVENTORY + payables
When purchased:
Dr Inventory
Cr Cash/AR

When sold:
DR COGS
Cr Inventory

PERIODIC: PURCHASES + payables
When purchased:
Dr Purchases
Cr Cash/AR

When sold:
no entry is passed cause periodic

End of period:
Dr Closing inventory (physical stock count by FIFO/wt.ave)
Dr COGS (opening inv + puchases - ending inv)
Cr Opening inv
Cr Purchases