AFM 191 - 5.1: accounting for inventory transactions Flashcards
define a merchandising business
company that purchases finished goods from a manufactured business + resells them to customers at a higher price to make a profit
define inventory
asset account on the balance sheet that holds the costs of merchandise before it’s re-sold to customers
how to recognize the cost of merchandise?
cost of inventory moves out of the balance sheet + is recognized as an expense on the income statement as Cost Of Goods Sold in the same period in which revenue is recognized
define Cost of goods sold (COGS)
an expense on the income statement used to recognize the cost of inventory when it is sold to a customer
What does ASPE indicate should be included in the cost of inventory?
cost of merchandise, cost to deliver merchandise + other costs directly attributable to the purchase of the merchandise (insurance, costs paid to get inventory ready for sale)
What should be deduced when calculating inventory?
trade discounts or rebates
what’s the formula to calculate inventory?
inventory cost = cost of merchandise + merchandise shipping + handling cost + other costs directly attributable to the purchase of merchandise - trade discounts or rebates
define perpetual inventory system - when is inventory counted?
system which uses computer software to keep track of goods bought, sold, and on hand
inventory is manually counted at least once a year
e.g. big name grocery stores, most large retailers
define periodic inventory system - when is inventory counted?
system which does not keep track of goods bought, sold, and on hand
inventory is manually counted several times a year
e.g. small privately owned retailers
what’s the formula used in an inventory system
beginning inventory + inventory purchase - COGS = ending inventory
define accounts payable
amount owed to suppliers for goods received that have not been paid yet
define a purchase order
source document that representa ta request to purchase goods + includes purchase order number to track the order, number fo units ordered + price per unit
does a journal entry created for a purchase order?
no, as no transaction has been exchanged, no goods/services or cash has been exchanged
What are the 3 ASPE inventory costing methods
- specific identification method
- first-in, first-out method
- weighted average cost method
Define specific identification method
inventory costing method used to measure COGS, where each item in inventory = identified + tracked
What’s the ASPE guidance for specific identification method? and examples?
required for inventory that is not interchangeable - also required for inventory used for specific projects
customers specifically buy 1 item,
- e.g. building custom luxury car, home
define FIFO method
an inventory costing method used to measure COGS, where it’s assumed that inventory purchased or produced first is sold first
what’s the ASPE guidance for FIFO method? provide examples of FIFO
appropriate to use for inventory that is interchangeable - common for companies that sell a large number of similar products that are available for purchase to all customers
e.g. clothing stores, grocery stores
define weighted average cost method
inventory costing method used to measure COGS, where the weight average cost of inventory is assumed to be the cost of inventory sold
What’s the ASPE guidance for the weighted average cost method? provide examples
appropriate to use for inventory that is interchangeable
e.g. clothing stores, grocery stores
What’s the formula to FIFO method
- calculate cost of goods sold in the month
- prepare the COGS journal entry for the month
- calculate ending inventory balance at month-end close
What’s the formula for the weighted average cost method
- calculate COGS for the month (weighted average cost per unit)
- calculate ending inventory balance at month-end close
