Ch 7 Inventory Flashcards
classification of inventory
raw materials
work-in-process
finished goods
work in process goods will be recorded at the end of each accounting period, the costs will include
raw materials cost plus labour costs and overhead costs
Overhead costs
Manufacturing costs other than the costs of raw materials and labour, such as utilities and depreciation of the manufacturing facility.
costs for finished goods
when the goods are finished the costs from work in process will be transferred to the finished goods, then when they are sold they will be transferred into a cost if goods sold account
4 kinds of transactions as the inventory moves through a manufacturer
1) Raw materials are purchased.
2) Raw materials are used and incorporated into the manufacture of products. These are known as work-in-process until the manufacturing process has been completed.
3) The manufacturing process is completed and the goods move from work-in-process to finished goods.
4) The goods are sold and move from finished goods to cost of goods sold.
FOB Shipping point
Free On Board shipping point means that
buyer owns the inventory when it leaves the seller’s premises.
FOB Destination
Free On Board Destination means that
buyer owns the inventory when it arrives at the buyer’s premises.
Return Asset
Inventory that has been returned by a customer in a condition that enables it to be resold to another customer.
It’s recorded in the Estimated Returns Inventory account
COGAS
Cost of Goods Available for Sale
Opening inventory plus the cost of purchases
Periodic Inventory System
An inventory system in which cost of goods sold is determined by counting ending inventory, assigning costs to these units, and then subtracting the ending inventory value from cost of goods available for sale (that is, the sum of the beginning inventory plus purchases for the period).
COGS Model for the Periodic Inventory System
Opening Inventory
+ Purchases
__________________________________________
Cost of goods Sold Available for Sale
- Ending Inventory (based on a physical count of inventory)
________________________
COGS
Pros and Cons of periodic inventory system
Pros
small upfront cost
easy to operate
Cons
have to spend more on wages during the physical count of inventory
does not account for theft
does not provide management with the most up to date info
Perpetual Inventory System
An inventory system in which the cost of goods sold is determined at the time a unit is sold and ending inventory is always known, in both units and dollars.
Inventory shrinkage
The losses of inventory due to spoilage, damage, theft, or waste.
Journal entry for when the inventory is purchased periodic inventory system
DR Inventory
CR Cash or A/R
Journal entry for when the inventory is purchased perpetual inventory system
DR Purchases
CR Cash or A/R
Journal entry at the time of sale periodic inventory system
DR Cash or A/R
CR Sales Revenue
DR COGS
CR Inventory
Journal entry at the time of sale perpetual inventory system
DR Cash or A/R
CR Sales Revenue
Additional closing entry for periodic inventory system
no entry required unless there is shrinkage or theft to record
Additional closing entry for perpetual inventory system
DR Inventory (Closing)
DR COGS
CR Purchases
CR Inventory (Opening)
Electronic Data Interchange (EDI)
A link between two companies with computers allowing inventory to be ordered directly over the computer connection
3 key points on cost formulas
1) Cost formulas are necessary because inventory purchase costs change.
2) COGAS is the same regardless of the cost formula used.
3) The three cost formulas result in different allocations of COGAS between ending inventory and COGS.
3 types of cost formulas
1) specific identification
2) weighted average
3) first in first out (FIFO)
the impact on cost allocation depending on usage of the periodic or perpetual inventory systems
- have no impact on cost allocation under either the specific identification or FIFO cost formula
- result in different cost allocations under the weighted-average cost formula
Specific identification
tracking the cost of each individual item
makes sense if items sold are unique and expensive
weighted average method
the price changes with each new batch of inventory (in a way the price gets diluted)
can only be used if the product is interchangeable (homogenous)
FIFO
first in first out method
the first batch that is sold is sold for the price for which they received the first batch
can also only be used if the products are interchangeable
which cost allocation method would you choose if you wanted to maximize profit?
FIFO
which cost allocation method would you choose if you wanted to minimize the profit?
Weighted average
Net realizable value
Expected selling price - costs to complete and sell the unit
Companies are required to carry inventory at _____________
the lower of cost and NRV
Inventory Write-down
The reduction of an inventory item’s carrying amount when its estimated net realizable value is less than its cost. A writedown is treated as an expense (part of cost of goods sold) in that period.
