ACC 305 2 Flashcards
7.1 - Inventory
name for goods manufactured or purchased that will be HELD FOR RESALE – (diff. from supplies/equipment)
–hold to be USED = supplies, RESALE = inventory
once sold, move from BS to IS as COGS
inventory timeline
- BUY - raw materials or goods for resale
- ADD - value (labor and overhead) - and bring resources to add value
- SELL - finished inventory
- COMPUTE - end inv. and COGS
which of the costs associated by “value added” process are part of cost of inventory and which are expenses for period?
how should total cost be divided btwn inv. that was sold and ending inventory
BEG INV. \+ inv. purchased = goods available for sale --goes into COGS as sold so into IS --or goes into end. inv. - remaining on BS
manufacturing comps have 3 parts in inventory
inventory - diff. in merchandising/wholesale/retail - WalMart(bc bought and put on shelf) and a manufacturing comp.
manufacturing comps. have 3 parts
- RAW MATERIALS
- -goods acquired in undeveloped state that are used to compose major part of finished product - metal–> planes, wood –> furniture - WORK IN PROCESS
- -partially completed products - part done stuff seen on factory floor - adding value stage - FINISHED GOODS
- -completed products waiting for sale
- -completed car rolling off automobile assembly line
Manufacturing like Boeing and GM
- DIRECT COSTS - actual material that makes up product
- DIRECT LABOR - line workers who make product/add value - the skilled crafts ppl who take materials and make products
- MANUFACTURING OVERHEAD - infratructure (rent, building, insurance, supervisors, maintenance, quality control inspectors)
- -have to decide which % of labor/overhead costs go to that direct piece of inventory (what % rent?)
costs included for merchandising company
Wal-Mart
- ITEMS PURCHASED AT WHOLESALE
- -cost of item - freight in - receiving and storage costs
breaking up costs for merchandising
- raw materials - cost of purchase, freigh, and rec. and storage
- WIP - sum of costs of raw materials, labor, and some % of manufacturing overhead (keeps factory winning)
- finished goods - total of materials, labor and overhead used in product
costs incurred in the sales efforts are not inventory costs - should be in operating costs
who owns the inventory?
party who has the LEGAL TITLE (can put it on their BS) - person who holds the inv. usually exceptions:
- goods being shipped (depends on terms)
- –FOB shipping point –> yours as soon as supplier ships to you - goes on buyer’s BS even though haven’t rec. it yet (buyer pays shipping costs)
- -FOB destination –> ownership transfers at delivery - so seller owns durin transit and on seller’s BS (if seller pays shipping costs)
- -FOB = free on board - goods on consignment
- -consigner - owns, doesn’t have - person who gives it away)
- -consignee - does not own, but has and tries to sell
- -IMP. bc whoever OWNS it has it on their BS
consignment
- -suppliers (Wealthy consigners) provide inventory for resale while retaining ownership until sold )sale-through arrangement)
- -inv. physically in firm’s building but NOT on BS - don’t bear risks of acquiring inventory - own capital not committed
accounting process involves judgment of who has owndership – impacts COGS and NI
two diff. systems to keep track of inventory
- periodic
- -update records periodically (roadside fruit and veggie mkt. - newsstand - almost all sales morning rush hour so lose sales if count one by one as sold bc time)
- -track by knowing what you start with and count later to see what end with
- -accting records not updated when sale is made - only dollar amt. - used with small businesses - with MANY quick sales - inv. with is recorded low value and large # of diverse items - perpetual (super mkt.)
- -super mkt. with lazor check outs - tracks each indiv. purchase and inv. record is updated instantly! - accurate and on time
- -sell things of HIGH value = TV, fridge, appliances
- -large volume of products sold - or run ou quickly – need to know how many are left over
- -or if avoiding cost of overstocking - tech. is easy to keep track of
as tech inc. = easy to gather info., store, and analyze - cheap = inc. number of perpetual systems
accounting for the 2 diff. inv. systems
- -buying shirts
- -transportate costs
- -returns
- -discounts
- periodic
- -DOESN’T touch inv. account during year - only at end!!
- -INV. and COGS only computed at YEAR END
- -nominal accounts used to track NET purchases during year
- -don’t know much was lost or stolen - perpetual
- -INV. and COGS updated with every indiv. transaction!!!!
- -using inv. count can calc. how much was lost/stolen
- -but more expensive to run
ex. 1000 shirts at $10 each and 300 pants at $18 each
1. periodic
purchases 10000
AP 10000
purchases 5400
AP. 5400
“purchases” - becomes a temp. holding account for inventory during year
2. perpetual
inventory 10000
AP 10000
inventory 5400
AP 5400
in another example of transportation costs - the periodic made temp. account for “freight in” and credit cash and perp. did “inv” and cash
- –for returns - debit AP and credit “purchase returns” and perp. did AP and inv.
- -discounts - debit AP and credit “purchase discount” (contra-purchase account) where 2% discount on shirts perpetual did debit AP for 9700 and credit inv. for 194 and cash for 9506
- ——so it dec. the inventory to balance AP on BS
diff. accounting in SELLING shirts
sell shirts for 15000
1. periodic
AR. 15000
sales 15000
--don't touch COGS yet!! - so just "sales"
---for the costs...have to consider all costs included in acquiring and selling the shirts (discount, freight, returns)
2. perpetual
AR 15000
sales. 15000
COGS. 6000
invetory 6000
if return some
1. Sales return 1250
AR 1250
—no COGS or INV have been recorded yet so no change there!!
- Sales returns. 1250
AR 1250
inv. 500
COGS 500
finding total cost of inventory
purchase price (10000) \+ freight in (970) - returns (30 shirts) = 300 - discounts (194) = total cost of shirts (970 shirts) = 10476 / 970 shirts = $10.80 per shirt
closing entries - T-accts. are a lot busier on perpetual bc inv. and COGS are recorded
2. perpetual - NO entries req. at end of yr. to adjust inv. (bc constantly changing during year)
- periodic - did not touch inv./COGS all year!! - so have all temp. accounts with their net purchases
- -need to ADJUST and CLOSE OUT all temp. accts. and add to inventory = close out temp. accts.
purchases act. 10000 5400 ---------- 15,400 ---so credit 15400 to close!!
returns acct.
300
–so debit 300 to close out!
discounts
194
—debit 194 to close
freight in
970
–credit 970 to close out
Find net cost from all temp. accounts and add to INVENTORY ACCT!!!
- -to fin COGS - Do physical count of remaining inv.
- -add diff. btwn beg. and end. inventory and put in COGS (for periodic) - then make JE
closing INV!
Inventory (debit - adding in balance) 15,876
returns 300
discounts 194
freight in 970
purchases 15,400
closing COGS
COGS. 9100
INV 9100
inventory cost flow assumptions!!!
specific identification - to specifically identify the cost of each particular unit that is sold (bar codes = works with some things)
- -but with rice/wheat…can’t tell - bc at diff. times cost diff.
- -can look at end inv. and see which of each type/cost are left = so can tell which were sold
- -no assumptions bc know exactly when sold
- -but this is impratical and timely
THE PHYSICAL FLOW OF GOODS DOES NOT HAVE TO BE THE SAME AS THE ASSUMED ACCOUNTING FLOW ASSUMPTION
—but some industries have to so not NEVER - bc grocery stores use FIFO bc goods are perishable
beg inv. \+ inv. purchased = goods available for sale - end inv. = COGS
the diff. cost flow assumptions
- FIFO
- -first inf irst out - oldest units sold first and newest stay in inventory
- -find the goods available for sale in $ and units - then find # units sold - find # units remaining in end. inv.
- -find cost of inv. remaining in end. inv. using method
- -compute cost of inv. sold during period using method - COGS
- -if prices going up! LIFO gives high end inv. and low COGS so higher NI
- -good bc gives most RECENT COSTS on BS – so lower COGS and higher NI = higher income taxes - LIFO - last in first out - sell the new first
- -cost of most recent nits sold – COGS are new and end inventory is old
- -when prices go up!! LIFO gives higher COGS and lower NI than FIFO - bc high priced goods assumed to be sold
- –good bc most recent costs are on INCOME STMT in COGS
- -over 1/2 large comps. use LIFO bc lower NI and lower taxes!!! - average cost flow
- -selling a mix
- -compute ave. for all inventory available for sale during period
- -COGS = multiply # units sold by ave. cost per unit
- –end inv. = multiply # units in end inv. by avg. cost per unit
ex. 10 for $200 beg inv., 8 for $250, 16 for $300 and 10 for 320
- -total value is 12,000 / 44 units = 272.73 per unit
- -so if sell 28 and keep 16
- -COGS = 28 * 272.73 = 7636
- -end inv. = 4364
Inv. turnover and days in inv. and AP
money tied up in inventory cannot be used! so minimize inventory investment
–JIT (just in time inv.) – attempt to have exactly enough inventory arrive just in time for sale
company’s operating cycle
CASH –> INV –> AR –> CASH
inventory turnover = COGS / avg. inventory
- -bc have inv. at beg. and end but COGS occurs throughout so do avg.
- -HIGH = more efficient - how rapidly are they turning over their inventory
days sales in inv. = 365 / inventory turnover
- -how many days does it take on avg. for them to turn over their inventory
- -want it to be small = quicker!!
but make sure you are comparing apples to apples!!! must both be doing LIFO or bot doing FIFO = can change numbers by a lot!!!
# days purchases in AP = 365 days / (purchases/avg. AP) --how long until we pay our suppliers for goods we've purchased
operating cycle
learn the graphs!!!
inventory roll-fwd (Class notes)
beg. inv. (on BS)
+ inventory purchased/produced (CFS)
- COGS (IS)
= ending inv. (BS)
T acct.
Beg. Bal
purchases
COGS
= end balance (debit)
COGS for service companies
“cost of services”
–includes cost of providing those services…labor, compensation, travel
(LIFO, FIFO, AVG. method not applicable)
–compensation to employees, personnel costs, contract delivery, recruiting and training, software development, integration of acquisitions
FB - “cost of revenue”
–exp. of operation of data centers, facility and server equipment deprec., salaries, benefits, energy costs, partner arrangements, cost of consumer hardware device inventory sold
for information/difital companies (FB, GOOGLE, TWITTER)
- -COGS = “Cost of revenues”
- -includes delivering digital content, traffic and content acquisition, data operations
- -Google: costs paid to Google network members for ads displayed on their properties, distribution partners, data centers, credit card fees
- -LIFO/FIFO not applicable
INV. COST ALLOCATION
DO NO follow physical flow of goods!!!
-accouning ASSUMPTIONS
specific identification is to specifically identify cost of each product sold - only practice for low volume/high cost items (cars, paintings)
periodic system: count ending inv. periodically and then PLUG for COGS (in the t account above)
–perpetual - track COGS as sales are made, then plug for end. inv.
only U.S. allows LIFO!!! Foreign countries don’t - bc gets you out of taxes - bc prices are almost always rising
LIFO layers
- -over time, creation of LIFO layers can result in large diff. btwn currentmkt. value of inv. (replacement cost) and reported LIFO cost of inv. - called the LIFO RESERVE
- -results in “layers” of inv. being create each year that purchase/production are more than sales (inv. keeps growing bc didn’t sell all of it - so have super old inventory that keeps not getting sold and they are only selling the new stuff)
LIFO Reserve = diff. btwn ending invetory computed using GIGO and LIFO eding inv.
under LIFO - old costs are on the balance sheet (20)
- -under FIFO - current replacement costs are on the BS (35)
- -LIFO RESERVE = 15
One company had 22% of its domestic inventory related to LIFO LAYERS aded in the 1970s!!!
John Deere reported the total FIFO value of inventory
- -then line for “less adjustment to LIFO value” – the iff. was the LIFO reserve!!!
- -adjustment to LIFO brought down the inventory by 1,461 –the 1,461 was the reserve!!
LIFO LIQUIDATION - when prices are rising…LIFO can give NI a boost - by cutting production or purhcases of inventory
- -liquidates inventory not sold in prev. period - which are valued at a lower cost than currently…so their rev. will be high but their COGS will be old bc they are using old inventory as COGS
- -a “slight cut to production” - dipping into their LIFO LAYERS to use OLD inventory to compute COGS
- –effect on John Deere was to bump up NI by $4M!!
LCM and mkt value
Inventories are stated at lower of cost or mkt. value
- -cost in US is mainly determined by LIFO valuation method!!!
- -foreign are mostly FIFO!!!
- -COGS includes raw materials, direct labor and indirect production and overhead costs
- -means inventory is generally sold at HISTORICAL COST
- –UNLESS the future utility rev. producing ability) of the asset drops below its original cost (damanged goods, obsolescence) - then it would be valued at lower of historical cost or mkt. value
what is mkt. value
- -if use LIFO - it is midpoint of (replacement, NRV and NRV-cost)
- -if other it is NRV
if mkt leads to impairment loss
under US GAAP - inv. write-downs are NOT reversible if mkt. value later rises again
–under IFRS - inv. can be written up after a write-down…but only back up to orig. cost
ratios
- -DSI
- -ACP
- -DPP
DSI - days sales in inv. - how long do we have inventory (365/ inv. turnover) or avg inv. / daily COGS (daily COGS = COGS/365)
ACP = avg. collection period - how long do we wait to get cash after the sale
= sales / avg. AR = AR turnover
then 365 / AR turnover = ACP
OR avg AR / daily sales
DPP - days sales in payables - how long until we have to pay for inventory
–purchases / avg AP = AP turnover
then 365 / AP turnoer = DPP
DSI + ACP = cash inflows
DPP = cash outflows
DSI + ACP - DPP = financing gap
operation cycle is number of days from when we use cash to buy the inventory, pay suppliers, and sell the inventory then collect the cash
12.1 - why comps. invest in other comps.
when comp invests in another - need to acct. for initial purchase, dividends/interest, change in value, and selling/maturing securities
why? MAJOR REASON is to EARN RETURN ON EXCESS CASH
- store surplus or safety cusion cash
- cyclical cash needs
- earn investment returns
- investment for influence (A on B - seat on board of directors)
- Investment for control (A wants to control B - synergies)
if company A has surplus ash?
- -invest bank in business?
- -pay div.–pay down debt
- repurchase own shares
- -invest in other comps stocks/bonds
ex. cyclical/seasonal comps - have excess cash at times
- -when comp. has insufficient cash they borrow or sell assets
- -during excess cash periods - prefer to invest $ and earn a return
- -could do at bank with fixed returns…but low rate - so if comps. et higher return
or inv. in oher comp to purchase strategic resources, to influence board of directors, or diversify products
- -many inv. = gain controlling influence in comp. decisions
- -ex. rather than developing something yourself tech.)…just buy comp. who already did it
classifying a security
way you acct. for something depends on how it is classified
Equity
–traded on public exxchanfes (like debt) - but has ownership interest - can vote on who serves on a board of directors and who will be auditor
diff. ways to acct. bc intentions of holder changes
1. held to maturity - only debt
2. trading = debt or equity
3. available for sale = debt or equity
4. equity method = only equity
classification determines if securities are reported at COST or FAIR VALUE
- -IS = if gains/losses are reported in NI? or else?
- the accounting reflects mgmt. intentions in investing
- held to maturity securities
buy DEBT security with intent and ability to hold to maturity
- -rec. periodic int. - it is recorded as interest revenue
- -at maturity = trade on asset for another (replaced with cash
- -NO CHANGES IN FAIR VALUE ARE RECOGNIZED
- -so as rates fluctuate i don’t care bc just plan to safel rec. CPN and FV = bc HOLDING
ISSUER becomes bond payable with contra-acct for any discounts
INVESTOR -price paid (PV) is debited to investment acct.
- equity method securities
if securities are HELD WITH OBJECTIVE OF SIGNIFICANTLY INFLUENCING THE OPERATIONS OF THE INVESTEE
- -records change in the value of the investment as net assets of investee change
- -assumption: if investo can influence operating decisions of investee…than any change in net assets of investee should be reflected on books of investor
significant influence = ownership of at least 20% of the oustanding common stock, but < 50% - have to have at least 20% to have influence
—CONTROLLING INTEREST = own > 50% of stock
FASB also suggest companies look at other factors to determine control - ownership of large minority voting interest (approx. 40%) with no other group owning significant influence
- –in this case the parent comp. (Acquiring) and subsidiary comp. (acquired) are req. to combine their fin. stmts. into one set of stmts. (partner)
- -called CONSOLIDATED FIN. STMTS.
- -so when my inv. acct. inc. when you make money or net assets inc.
- -but hwen acquired comp. pays me (owner) div. –> my inv. account goes down (bc they reduced your ownership in them)
ONLY PERMANENT DECLINES IN FAIR VALUE ARE RECOGNIZED
–Don’t care about temporary fluctuations in prices bc intent is to influence long term!!
- trading securities
- -D&E securities held with intent of selling securities should need for cash arise ro to realize gains arising rom short term price changes
- -purchased for RETURN ON EXCESS CASH - actively managing inv. portfolio
changes in fair value are recognized on BS and IS!!!!!
- -all changes (ST) in fair value go to IS
- –periodic interest (Debt) or dividends (E) are recorded as rev. when received
- Available for sale securities - most common!!!
D&E - publicly traded securities that are not classified as held to maturity or trading or equity
int. and div. recorded as rev. when receive —> changes in fair value recognized on BS but NOT income stmt!!! (AOCI instead)
- -temp. changes in va. are recorded on BS but NO gain/loss is realized in IS –> instead make adjustment to stockholder’s equity acct. (AS UNREALIZED INC./DEC/ IN VALUE OF AVAILABLE FOR SALE SECURITIES)
- -not IS bc we don’t know when we will sell and realize gains/losses (where in trading we assume they will be sold quickly) - uncertainty
diff. acct. methods for changes in mkt. value
- -hold and equity = temp. changes don’t matter bc not intent
- -but TRADING have intent on return through div. or cap. gains
- —ex. P inc. and rec. div. = recognize the $100 div. AND the $200 unrealized mkt. gains as INCOME, but the $100 was rec. and the $200 gain was not
- —the securities have to be sold in order to actually rec. the $200 as tangible “income” from these cap. gains
- -but they DO recognize the gain…even though it wasn’t received
mkt to mkt accting
= recording of unrealized “paper” gains/losses
- -in TRADING securities
- -put fair values in your fin. stmts. bc intent is to get returns!!!
determine classification of fixed maturity and equity securities at ACQUISITION DATE - so when you acquire you have to already decide what your intent it
- –LT investments – change in fair value is ignored
- -held-to-maturity carried out at AMORTIZED COST
- -trading carried out at FAIR VALUE
- -all other are available for sale and carried at fair value with net unrealizable gains/losses in AOCI
IMPAIRMENT
- –when temp. changes in value of available for sale an dheld to maturity investments are not recognized on IS – the dec. in value called impairment is not considered temporary and impairment loss must be recorded in earnings
- –loss = diff. btwn investment cost and its fair value on BS
