6.5 Presentation and Analysis of Inventory Flashcards
what is NRV
net realizable value: the future economic benefit a company will recieve when selling an item of inventory
selling price-cost
why do we care about NRV
because even tho companies want to sell goods at a higher price than their cost, we have to be realistic in ho wmuch money the good can be sold for
if NRV is lower than the cost
(Cost>nrv)
company must adjust the inventory account balance to the NRV
this is the lower of cost and nrv rule
what is the lcnrv rule
lower cost of nrv rule is that if nrv is lower than the cost of a good, we must adjust inventory to the nrv
when do companies apply the lcnrv rule?
at the end of each accounting period
if NRV is higher than cost?
do nothing!!!! because if u increase it then you are violating the concept of reporting at lcnrv!!
how to apply the lcnrv rule
1) determine the cost for each type of inventory (specific id, fifo, or avg cost)
2) determine nrv of each inventory type
3) compare nrv of each inventory type to its cost (determine if cost >nrv)
4) if cost > nrv, ADJUSTING ENTRY!!
(COGS DR, AND INVENTORY CR) (similar to the shrinkage je)
what balance of inventory do you report to the sofp?
sum of lcnrvs
what do ifrs and aspe require companies to disclose in fs/ notes to fs
the total (carrying) amount of inventory in the current assets section of the statement of financial position;
the cost of goods sold;
the cost formula(s) used (specific identification, FIFO, or average cost);
the amount of any writedown to net realizable value or reversals of previous writedowns, including the reason why the writedown was reversed;
andthe amount of any inventory pledged as security.
what is inventory turnover ratio
measure the number of times, on avg, that it sells inventory during the period
cogs for the period/average inventory
cogs for the period=
avg inventory= (begin inv + end inv )/2
days in inventory ratio
365 days/inventory turnover
this tells u inventory turnover daily!!! this measures the average age of the inventory or avg number of days it takes to sell inventory on hand
higher or lower value better for inventory turnover?
higher
extremely high is bad= shortages
higher or lower value better for idays in invetory?
lower!! sellig inventory quikly
extremely low is bad= shortage
how do you measure inventory turnover units?
times
how do you measure days in inventory units
days
what types of ratios are inventory turnover and days in inventory
liquidity ratios along with current ratio
Inventory is a significant component of the current ratio, and a high level of inventory will result in a high current ratio. However, if inventory is not turning over very quickly, this will result in an “artificially” high current ratio that is not indicative of high liquidity. Consequently, we can never interpret the current ratio unless we look more closely at the nature of its components, such as inventory, and assess its turnover(
Inventory is a significant component of the current ratio, and a high level of inventory will result in a high current ratio. However, if inventory is not turning over very quickly, this will result in an “artificially” high current ratio that is not indicative of high liquidity. Consequently, we can never interpret the current ratio unless we look more closely at the nature of its components, such as inventory, and assess its turnover(
Many companies have moved to streamline their supply chain operations, which include purchasing inventory and transporting it to a desired destination. One way of managing inventory on hand is to use a just-in-time approach. This means that a company avoids ordering large quantities of an inventory item, particularly one that is not in high demand, because ordering large quantities increases the time that the company will hold this inventory. This leads to an increase in a company’s holding costs, such as interest on loans received to buy the inventory, storage costs, and insurance. If a company orders goods more frequently and in smaller quantities, it can receive and sell these goods at or about the same time. This reduces inventory quantities on hand. It also improves the inventory turnover ratio. However, during COVID and other times when inventory supply chains can be disrupted, companies must ensure that enough inventory is on hand to meet demand.
Many companies have moved to streamline their supply chain operations, which include purchasing inventory and transporting it to a desired destination. One way of managing inventory on hand is to use a just-in-time approach. This means that a company avoids ordering large quantities of an inventory item, particularly one that is not in high demand, because ordering large quantities increases the time that the company will hold this inventory. This leads to an increase in a company’s holding costs, such as interest on loans received to buy the inventory, storage costs, and insurance. If a company orders goods more frequently and in smaller quantities, it can receive and sell these goods at or about the same time. This reduces inventory quantities on hand. It also improves the inventory turnover ratio. However, during COVID and other times when inventory supply chains can be disrupted, companies must ensure that enough inventory is on hand to meet demand.
