Chapter 6 Flashcards
Determination of inventory qualities involves?
Taking physical inventory of goods on hand
Determining ownership of goods
What involves in taking a physical inventory ?
- Counting, weighing, measuring each kind of inv on hand
- each count lists quantity of each inventory on summary sheets
- quantity of each good is then multiplied by its unit cost to determine total cost of inv
Fob shipping point ownership
Owner ship passes to the buyer in transit and buyer pays shipping costs
Fob destination ownership
Ownership transfers when buyer receives the goods and the seller pays shipping costs
Goods in transit
- Only include inventory owned by the company
- if destination: goods need to be included in inventory count
Consigned goods
- Consigner: owns the goods
- consignee: holding the goods but doesn’t own them
- ex. Consigned sends goods on consignment to the consignee
- ex. Artists send paintings to art galleries on consignment
- artist= consigned
- art gallery = consignee
Overview of FIFO (first-in, first-out)
- FIFO rule is applied at the time of each sale
- FIFO assumes earliest goods are sold first
- often reflects the actual physical flow of merchandise
Costing (FIFO)
- Cost of oldest goods purchased first are recognized as cogs
- cost of most recents goods purchased are recognized as ending inventory
Perpetual FIFO vs. Periodic FIFO
Difference: journal entries
- perpetual records cogs at time of sale while periodic doesn’t
FIFO - perpetual
- The seller of goods records entries:
Debit a/r, credit revenue for goods sale price
Debit cogs, credits mercy inv for goods cost price
Weighted average
- Not practical to measure specific physical flow of inventory
- so, better to use average price for goods available for sale
Weighted average is applied when good arre sold
- To units sold to determine cogs
- to units on hand to determine ending inventory
Average - perpetual
Total cost / total units = weighted average
Periodic - FIFO
Step1: ending inventory
= cogas / units available or sale
Step 2:
= units x unit cost
Step 3: cogs inventory
Cogas - ending inv = cogs
Financial statement effects (3)
- income statement effect
- balance sheet effect
- cost formula should be used consistently
Income statement effect
- When prices rising, FIFO produces higher profit
- when prices falling, opposite is the
Balance sheet effect
FIFO provides the most current valuation of inventory
Cost formula should be used consistently
- Enhances comparability of statements overtime
- choose method that best corresponds with actual physical flow
Using cost flow methods
- Companies need to use the same cost flow method from period to period
- this enhances comparability of financial statements over time periods
- if company switches methods every change and effects on net income need to be disclosed in financial statements
Analysis of inventory
Ratios help determine whether a company has too little or much inventory
(inventory turnover, Days sales in inventory)
Inventory turnover ratio
= cogs/average inventory. (Begin inv + end inv ) /2
-# of times inventory gets turned over during period
- The more turnover, the more sales being made
Days sales inventory
= Days in a year/ inventory turnover
-# of days on average the inv is getting sold
