Chapter 5 - Inventory Flashcards
FOB Shipping Point
- Purchaser owns the goods when leave seller’s place of business (while in trasit)
- Included in Purchaser’s inventory count
- Purchaser pay transport costs
FOB Destination
- Purchase owns the goods when they arrive at the purchaser’s dock
- Seller owns goods while in transit
- Included in seller’s inventory count
- Seller pays transportation costs
Perpetual Inventory System
- Used for all types of goods
- Keeps a RUNNING total of all goods
- You count everytime you sell a product
Opening Inventory + Purchases = COGAFS
COGAFS - COGS = Ending Inventory
Periodic Inventory System
- Used for inexpensive goods
- Every once in a while we count the inventory
- Calculate the Ending Inventory, then apply the formula
Opening Inventory + Purchases = COGAFS
COGAFS - Ending Inventory = Cost of Goods Sold
Goods Avaiable for Sale = Begg. Inventory + Purchases
Ending Balance = GAFS - Cost of Goods Sold
Cost of Net Purchases of Inventory
= Purchase Price
+ Taxes
+ Customs/Duties/Tariffs
- Purchase returns (buyer returns the good to the seller)
- Purchase allowances (any allowance from an amount owed)
- Purchases discounts
+ Maybe freight (FOB Shipping or FOB Destination)
Net Sales
Sales Revenue
- Sales Returns and Allowances
- Sales discounts
= Net Sales
[Inventory Cost Method]
Specific Identification Cost
- Unique Inventory Items: jewels
- Cost the inventories at the specific cost of the particular unit
-Too expensive for inventories with common characteristics
[Inventory Cost Method]
Weighted-Average Cost
- Each new Purchase make a new unit cost
- Avg Cost per Unit = Cost of Goods Available (Begg. Inventory + Purchases) / Number of Units Available
Cost of Goods Sold = Number of units sold x Avg Cost per Unit
Ending Inventory = Number of Units on Hand x Avg Cost per Unit
Firs-in First Out (FIFO)
- Oldest Items assumed to be sold First
Best inventory method when their costs are increasing
FIFO (Gross Profit is higher)
Lower-of-Cost-and-Net-Realizable-Value Rule (LCNRV)
- Principle of Relevance of representation and faithfulness (Inventory can become obsolete or damaged or its selling price can decline)
- Inventory is reported at the lower of Cost or Net Realizable Value (NRV), which usually replacement cost (Market Value)
- If NRV is lower, inventory is written down
- To write down:
DR COGS
CR Inventory
To reverse is the opposite.
Gross Profit Percentage
Gross Profit / Net Sales Revenue
Inventory Turnover
COGS / Average Inventory
Avg Inventory = (Begg Inventory + End. Inventory)/2
It shows how many times the company sold or turned over its average level of inventory during the year.
Where do the Inventory Transactions are reported on the Statement of Cash Flows?
Operating Activities
They drive the company’s operation
How Managers can report more profits by manipulating the inventory?
1) Overstating Ending Inventory
2) Creating Fictious Sales Revenue
