Chapter 6 Terms Flashcards
What can affect the cost of inventory?
- discounts
- returns
- transportation costs
- shrinkage
- different purchase cost from one item to the next of the same type
- sequence of inventory flow in and out of the company
What are three ways of determining the cost of an item?
- Specific Identification:
specific to the item (using perhaps a serial number for cars)
Each inventory item that is sold is matched with its purchase cost. Good when there are relatively few items that are expensive and are identifiable.
The following two methods are based on an ASSUMED flow (cost flow assumptions) of goods:
- First-In, First Out Cost Flow Assumption (FIFO):
oldest moves out of inventory first (for perishable items)
Assumes that the first goods purchased are the first ones sold. - Weighted Average Cost Flow Assumption:
average cost (for large quantities of lower priced items)
Goods purchased on different dates are mixed with each other. It is easy to calculate.
Inventory record card
Used to track individual transactions and records information about purchases such as date, number of units purchased, and purchase cost per unit. It also records cost of goods sold information with the same subsets of information.
In addition you have:
- balance of units on hand
- cost of each unit held
- total cost of the units on hand
merchandise inventory subledger
Provides a detailed listing of type, amount, and total cost of all types of inventory held at a particular point in time.
The sum of the balances on each inventory record card in the subledger would always equal the ending amount recorded in the merchandise inventory general ledger account.
Name a few examples of subledgers
- merchandise inventory subledger
- accounts receivable subledger
- accounts payable subledger
If 2022 ending inventory is overstated, how does this affect the other accounts in the next two years?
You actually have less inventory that year than you thought.
SAME YEAR (as ending inventory miscount) = 2022 COGS is US (you didn’t record enough expense)
SAME YEAR = 2022 Gross Profit = OS (overstated; you thought you made more than you actually did)
- NEXT YEAR 2023 beginning inventory = OS
because it would have been copied from 2022 ending inventory (but in the labs you usually don’t have to change this number because they correctly write it in already, or account for it in some other error) - NEXT YEAR 2023 COGS = OS
because 2023 ending inventory will be accurate, but the 2023 starting inventory will look higher than it is, so the difference in inventory from the start to the end of 2023 will look larger than it really was, and thus it will look like goods have gone missing, giving an overstated COGS for 2023 - NEXT YEAR 2023 Gross profit = US
because it is always the opposite of COGS in the same year - YEAR AFTER NEXT YEAR 2024 beginning inventory = no effect
- YEAR AFTER NEXT YEAR 2024 COGS = no effect at this point
- YEAR AFTER NEXT YEAR 2024 Gross profit = no effect
How does overstating inventory in the year-end count of 2022 affect gross profit for 2022? How does it affect gross profit for 2023?
You will overstate 2022 gross profit.
You will understate 2023 gross profit.
This is assuming that no corrections were applied after the 2022 year and that we are just looking at how it will fix itself for gross profit.
*If you do intervene and then take away from gross profit in 2022 to make up for the overstatement, then 2023 will not fix it, but just show less profit in 2023. Thus the total of both profits will be understated.
So if you intervene for the first year’s issue, make sure to also intervene for the second year. In this case you would need to add to the 2023 gross profit if you had already corrected the 2022 gross profit by taking some away.
net realizable value
the amount for which an item can likely be sold
laid-down cost
the actual cost at purchase, including the invoice price of the goods less any purchase discounts, plus transportation in, plus insurance while in transit, plus any other expense in order to get the item ready to perform at the place of business
LCNRV
LCNRV
This is the lower of cost and net realizable value; so compare the cost and the net realizable value and state whichever is lower
This can be applied to individual inventory items or groups of similar items. When similar items are grouped, some in the group may actually take on a higher value, if the group as a whole takes on a lower value, and this is okay.
Use the cost of goods sold account and merchandise inventory double-entry to make the adjustments to the inventory losing its value. Debit cost of goods sold and credit merchandise inventory to show this “depreciation/expense” of sorts. The adjusting entry amount will be the difference of the two costs between the one already on file and the new one you will be using.
Given sales and gross profit % how do you determine COGS?
We know that gross profit comes from sales - cost of goods sold from the regular calculation we do on the balance sheet.
gross profit = sales - COGS
But we must remember that gross profit percentage makes us divide gross profit by sales.
gross profit percentage = gross profit / sales
where gross profit = sales - cost of goods sold
So if we put those two equations together we get:
gross profit percentage = (sales - cost of goods sold) / sales
Isolating for COGS we get
(gross profit percentage)(sales) - sales = - COGS
which gives
COGS = Sales - sales(profit percentage)
or simpler to enter into software:
COGS = Sales ( 1 - profit percentage)
While taking the exam you only need to remember the top two equations because then once you sub them into each other and rearrange, you will be able to solve for COGS without needing to know anything more. But you will need paper to do this efficiently, and you should not need to waste time memorizing more than the top two equations.
Given cost of goods available for sale, and cost of goods sold, how do you find ending inventory?
ending inventory = cost of goods available for sale - cost of goods sold
cost of goods available for sale is at the start of the period
ending inventory is at the end of the period
cost of goods sold is at the end of the period
Given cost of goods available for sale, sales, and profit percentage, how do you determine ending inventory?
Since profit percentage also known as gross profit percentage is gross profit over sales giving a fraction that is expressed as a percent:
gross profit percentage = gross profit / sales
And isolate gross profit you get:
sales ( gross profit percentage) = gross profit
But also:
gross profit = sales - COGS
And isolate for COGS you get:
COGS = sales - gross profit
And subbing in the very first equation on this page you get:
COGS = sales - sales (profit percentage)
COGS = sales (1-profit percentage)
Then using the third equation you have memorized:
ending inventory = cost of goods available for sale at the start of the year - COGS
You get this when you sub in the COGS equation from before:
ending inventory = cost of goods available for sale at the start of the year - sales (1 - profit percentage)
SO YOU NEED TO MEMORIZE THE FOLLOWING:
gross profit percentage = gross profit / sales
gross profit = sales - COGS
ending inventory = cost of goods available for sale - COGS
Eliminate the gross profit by subbing the first two equations together since that is neither given nor needed
Given starting inventory, and purchases, how do you determine cost of goods available for sale?
cost of goods available for sale = starting inventory + purchases
Given net sales and gross profit, how do you determine COGS?
COGS = net sales - gross profit
because:
gross profit = net sales - COGS as you are used to seeing on the income statement for merchandising companies
gross profit is not the same as gross profit %. Be very careful to see the difference between the two.
