Chapter 6 powerpoint Flashcards
Merchandiser inventory classication
merchandise inventory
Three manufacturer inventory classifications
Finished goods inventory
work in process
raw materials
finished goods inventory
maunfactured items that are completed and ready for sale
work in process
manufactured inventory items that are completed and ready for sale
Raw materials
The basic goods that will be used in production, but have not been placed into production
Just in time inventory (JIT)
Companies manufacture or purchase goods just in time for use
Two reasons to count physical inventory in a periodic system
To determine the inventory on hand at the balance sheet date
To determine the cost of goods sold for the period
Two steps in taking a physical inventory count
- Taking a physical inventory of goods on hand
- determining the ownership of goods
FOB shipping point
buyer pays freight costs
ownership goes to buyer once given to mail carrier
FOB destination
Seller pays freight costs
ownership goes to buyer when mail carrier drops off goods to buyer
Consigned goods
Goods of other parties that agree to be sold with a fee, but without taking ownership of goods
Inventory
assets that will be resold
Cost of inventory
all the costs incurred to build the inventory
eg. factory, machinery, labor
Inventory and COGS
all costs necessary to acquire the inventory
Costs related to the sale
Not required for inventory acquisition should be classified as selling expenses and NOT in inventory
ex. freight-out
Lower of Cost or Market
US GAAP requires that all inventory be measured at lower of cost or market (replacement cost)
DOES NOT ALLOW upward revaluation of inventory
*consistent with conservatism
Specific Identification
When a company can positively identify which particular units it sold and which are still in ending inventory
Keep records of original costs
Sells a limited variety of high-cost items
In periods of increasing prices, what records highest net income?
FIFO
In periods of decreasing prices, what reports the highest net income?
LIFO
In periods of increasing prices, costs allocated to ending inventory using FIFO will __________________
approximate current costs
In periods of increasing prices, costs allocated to ending inventory using LIFO will ___________________
be significantly understated
LIFO reserve helps what?
to enhance comparability across companies, as users of financial statements can see difference in two inventory methods
lower taxes?
LIFO during increasing prices
Inventory Turnover Ratio
Cost of Goods Sold / Average Inventory
An indication of how quickly a company sells its good
higher = better
Days in inventory
365 days / Inventory Turnover Ratio
Measures average number of days inventory is held
Lower is better
Average inventory formula
(Beginning inv. + Ending inv.) / 2
Understate Beginning inventory:
COGS = understated
Net income = overstated
Overstate beginning inventory
COGS = Overstated
Net income = understated
Understate ending inventory
COGS = overstated
Net income = understated
Overstate ending inventory
COGS = understated
Net income = overstated
Ending inventory overstated (balance sheet)
Assets = overstated
Liabilities = no effect
SE = Overstated
Ending inventory understated (Balance Sheet)
Assets = understated
Liabilities = No effect
SE = understated
