Chapter 6 Inventories Flashcards
What steps are involved in determining inventory quantities
There are 2 steps
(1) Taking a physical inventory of goods on hand
(2) Determining the ownership of goods
How is ownership determined for goods in transit at the reporting date
Goods are considered in transit when they are in the hands of a public carrier. Goods in transit should be included in the inventory of the party that has legal title to the goods
FOB delivery point: Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller
FOB destination: Legal title to the goods remains with the seller until the goods reach the buyer
Who has title to consigned goods
Under consignment arrangement, the holder of the goods does not own the goods. Ownership remains with the shipper of the goods until the goods are actually sold to a customer.
When is it appropriate to report inventories at net realisable value
When the value of inventory is lower than its cost, the inventory is written down to its net realisable value
How to estimate net realisable value
NRV = Expected Selling Price - Total Production/Selling Cost
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completing the good or product and less any costs necessary to make the sale, such as marketing, selling and distribution cost
What is “inventory turnover” and how to calculate
Inventory turnover measures the number of times on average the inventory is sold during the period
Cost of sales/Average inventory = Inventory turnover
What is “average days to sell inventory” and how to calculate
Average days to sell inventory indicates the average time in days that a company takes to turn its inventory into sales
(COGS/Average Inventory) x 365
What is “inventoriable cost”
Inventoriable cost are the costs incurred in manufacturing or acquisition of products and to make them ready for sale
What is “inventory costing”
Inventory costing is the process of assigning value to inventory and thus to the cost of good sold. There are number of common costing method: FIFO, LIFO, Weighted Average Cost
What is “FIFO”?
FIFO means First in First out, it is an inventory costing method assumes that the earliest goods purchased are the first to be sold. Under FIFO method, the costs of the earliest goods purchased are the first to be recognised as cost of sales. Under FIFO, the ending inventory is based on the latest units purchase. The cost of the ending inventory is found by taking the unit cost of the most recent purchase and working backward until all units off inventory are costed
What is “Weighted Average Cost”
The Weighted Average Cost is an inventory costing method assumes that the goods available for sale have the same cost per unit. Note that this method does not use the average of the unit costs. Instead, the average cost method uses the average weighted by the quantities purchased at each unit cos
Why businesses adopts different inventory cost flow methods?
Businesses adopt different inventory cost flow methods for various reasons. Usually, one of the following factors is involved:
(1) Income statement effects
(2) Statement of financial position effects
(3) Tax effects
What is the income statement effects of FIFO
In a period of rising prices, FIFO produces a higher profit
What is the tax effect of Weighted Average Cost method
Weighted Average Cost method induce better tax benefit comparing to FIFO method
What will be affected when there are inventory errors
When errors occur, they affect both the income statement and the statement of financial position
