Chapter 7 Flashcards
What is the importance of inventory to a company’s overall success?
Inventory is a significant current asset and the largest asset to be converted into cash within the next year
Management’s objective is to sell inventory at a higher price than it was purchased for.
What are the different inventory classifications for a manufacturer?
- Raw materials
- Work-in-process
- Finished goods
A merchandiser’s inventory consists of finished goods purchased for resale.
Define FOB shipping point.
Buyer owns the inventory when it leaves the seller’s premises.
Define FOB destination.
Buyer owns the inventory when it arrives at the buyer’s premises.
What is the formula for Cost of Goods Available for Sale (COGAS)?
COGAS = Beginning Inventory + Purchases
What is a periodic inventory system?
Inventory purchases are recorded in a Purchases account without immediate entry to reduce inventory at the time of sale.
What is the process at the end of the period in a periodic inventory system?
Count inventory to determine quantity on hand and assign costs to calculate cost of goods sold.
What is a perpetual inventory system?
Continual tracking of units and/or costs, updating inventory and COGS after every transaction.
What is the formula for calculating Ending Inventory in a perpetual inventory system?
Ending Inventory = Cost of Goods Available for Sale - Cost of Goods Sold
What are the three cost formulas for inventory?
- Specific Identification
- Weighted Average
- First-in, First-out (FIFO)
What is the significance of cost formulas?
Cost formulas are necessary because inventory purchase costs change and affect the allocation of COGAS.
What is the Gross Margin formula?
Gross Margin = Sales Revenue – COGS
What is the purpose of inventory valuation?
Inventory is carried at the lower of cost or net realizable value (NRV).
What is NRV?
NRV = Expected Selling Price – Estimated Costs to Make Sale
What can cause inventory valuation errors?
- Errors during inventory count
- Inclusion/exclusion of items that should be excluded/included
How does inventory valuation errors affect financial statements?
They can result in misstatements of both the statement of financial position and the income statement.
What is management’s responsibility regarding internal controls related to inventory?
Management is responsible for ensuring that internal controls are in place to safeguard inventory.
What is the formula for Inventory Turnover?
Inventory Turnover = Cost of Goods Sold / Average Inventory
What is the Days to Sell Inventory formula?
Days to Sell Inventory = 365 / Inventory Turnover
What is the Gross Margin Ratio?
Gross Margin Ratio = Gross Margin / Sales Revenue
Fill in the blank: Inventory is recorded at its cost on the date of _______.
[acquisition]
What is the impact of NRV being lower than inventory’s cost?
The inventory must be written down.
What is the consequence of not correcting inventory valuation errors?
It will also affect statements of subsequent periods.
What considerations should management take into account when choosing an inventory system?
- Importance of complete, timely inventory information
- Cost of purchasing and maintaining the inventory system
