Ch. 8 Inventory measurement Flashcards
- goods controlled by a company
- can consist of virtually any tangible good
inventory
buys finished goods, resells them to their customers
- targer, walmart
- inventory is what they purchase from their suppliers
retailer
- inventory includes raw materials, work in process, and finished goods
- inventory would include materials plus the labor to build the product
manufacturer
shipping costs to receive the item
freight in
what costs get included in inventory
- costs to acquire goods and prepare them for sale to the customer
- purchase costs
- freight in
- sales tax
- storage fees
- transportation insurance
- 2 inventory cost systems
- periodic
- perpetual
- company only knows that balance of inventory at the end of the period
- determine the amount of inventory via physical inventory count
periodic
- company always knows the amount of inventory on hand
- inventory account continually adjusted for each change in inventory
- COGS account is adjusted each time goods are sold or returned.
- tracks both inventory quantities and inventory costs
- all major companies use
perpetual
COGS equation
COGS =
beginning inventory + net purchases = COGAFS - ending inventory
more workable with inventories of high cost items such as construction equipment or automobiles
perpetual or periodic
perpetual
more workable with inventories consisting of large numbers of low cost items
perpetual or periodic
periodic
apply at time of sale
FIFO & LIFO perpetual
apply at the end of the month
FIFO & LIFO periodic
legal title to the goods passes from the seller to the buyer at the point of shipment (when the seller delivers the goods to the common carrier); the buyer is responsible for shipping costs and transit insurance
FOB (free on board) shipping point
legal title to the goods does not pass from the seller to the buyer until the goods arrive at their destination (the customers location); the seller is responsible for shipping costs and transit insurance
FOB destination
a selling arrangement whereby the consignor physically transfers goods to another company to sell, while legal title and risk of ownership of those goods remain with the consigner during the consighnment period
consignment
- cost included in inventory
- costs associated with products and expensed as cost of goods sold only when the related products are sold
product costs
includes all necessary expenditures to acquire this and bring it to its desired condition and location for sale or for use in the manufacturing process
costs of inventory
freight costs are added to the inventory account in _____ system
perpetual
in a periodic system, freight costs generally are addded to this temporary account, which is added to purchases in determining net purchases
freight in account/transportation in
are not included in the cost of inventory
- they are reported in the income statement either as part of COGS or as an operating expense
freight out (shipping charges on outgoing goods)
a reduction in both inventory and accounts payable at the time of the return
purchase return
in a _____ inventory system the purchase return is recorded directly as a reduction to the inventory account
perpetual
in a ______ inventory system we use a purchase returns account to temporarily accumulate these amounts
periodic
reductions in the amount to be paid if remittance is madw within a designated period of time
purchase discounts
assume customer will not take discount
gross method
assume customer will take discount
net method
each unit of inventory sold during the period or each unit on hand at the the end of the period is matched with its actual costs
specific identification method
assumes cost of goods sold and ending inventory consists of a mixture of all the goods available for sale
average cost method
the weighted average is calculated only at the end of the period
periodic average cost
weighted average unit cost under periodic average cost equation
weighted average unit cost under periodic average cost =
COGAFS / quantity available for sale
a new weighted average unit cost is calculated each time additional units are purchased
perpetual average cost
moving average unit cost under perpetual average cost equation
moving average unit cost under perpetual average cost =
cost of previous inventory balance + cost of new purchase or (COGAFS) / # of units on hand
the ending inventory and cost of goods sold will have the same amounts in a perpetual inventory system and a periodic inventory system when ____ is used
FIFO
Companies never use perpetual inventory system when reporting on a ____ basis
LIFO
If inventory costs are rising throughout the year _____ _____ will generally result in lower cost of ending inventory and higher COGS than when applying _____ ____
- periodic LIFO
- perpetual LIFO
During periods of rising costs ____ results in lower cost of goods sold
FIFO
____ ending inventory includes the most recent higher cost puchases, resulting in a higher ending inventory
FIFO
____ ending inventory includes the lower cost of the earliest purchases
LIFO
if costs are declining, then ___ will result in a higher COGS and lower ending inventory
FIFO
a companys income tax returns will report a lower taxable income when inventory costs rise and inventory quantities dont decrease using
LIFO
if a company uses LIFO to measure taxable income, the company must use ____ for external financial reporting
LIFO
