Chapter 6 (Week 3) Flashcards
Inventory
purchases from suppliers with the intention to sell to our customers to earn revenues
Merchandising
Consists of holding merchandising inventory
They are owned by the company
They are in a form ready for sale to customers
Manufacturing
Consists of holding:
finished goods inventory: goods that are completed and ready for sale
work in progress: portion of manufactured inventory that has been placed into the production process but isn’t yet complete
raw materials: basic goods used in production but haven’t been put into production
JIT inventory
An inventory system in which companies manufacture or purchase goods just in time for use
Goods in transit
FOB shipping point (Free on board) - ownership passes to the buyer when the public carrier accepts the goods from the seller
- buyer pays freight costs
FOB destination - ownership of the goods remains with the seller until the goods reach the buyer
- seller pays freight costs
Consigned goods
Some businesses hold goods of other companies and try to sell them for a fee - but in this case they don’t have the ownership
Inventory is accounted for at —
Cost, which includes all expenditures necessary to acquire goods and place them in a condition ready for sale
At the end of the accounting period:
- sold: expense (COGS) –> income statement
- unsold: asset (inventory) –> balance sheet
Specific identification
Used for businesses with unique inventory items
If a business can identify which units it has sold and which are still in the inventory
Requirement: keep track of the original cost of each individual item
FIFO
Oldest items are sold first and thus are COGS
The remaining invenotry consists of the most recent purchase prices and it becomes ending inventory
Majority use it
LIFO
Most recent items are the ones sold first and thus are COGS
The remaining inventory costs of the oldest purchase prices and it becomes ending inventory
Not allowed to use it
Average cost method
Allocates the cost of goods available for sale on the basis of the weighted average unit cost incurred
Cost of goods available for sale / Total units available for sale = Weighted average unit cost
COGS: number of units sold x average cost / unit
Goods availiable: beginning inventory + purchases
Cost of goods sold in a periodic system
(beginning inventory + purchase) - ending inventory
Income statement effects of cost flow methods
Periods of inflation: FIFO produces a higher net income because:
Periods of falling prices: Average cost will report a higher net income because:
Statement of financial position effects of cost flow methods
FIFO (in periods of rising prices) will be more accurate in evaluating the cost of ending inventory
Therefore it will give a more accurate representation of the value of inventory (assets)
Tax effects of cost flow methods
FIFO reports higher net income but this exposes the company to a higher income tax
That is why some companies use average cost
