Chapter 7 Flashcards
Journal Entry to Buy Inventory:
dr. Inventory
cr. Cash or Accounts Payable
Journal Entry to Sell Inventory:
dr. Cash or Accounts Receivable
cr. Sales Revenue
and
dr. Cost of Goods Sold
cr. Inventory
Inventory Management Decisions
(1) Maintain a sufficient quantity of inventory to meet customers needs
(2) Ensure quality meets customers expectations and company standards
(3) Minimize the costs of acquiring and carrying the inventory
Purchase finished goods from suppliers for resale to customers.
Merchandising Companies
Purchase raw materials from suppliers and produce and sell finished goods to customers.
Manufacturing Companies
Types of inventory reported on balance sheet of manufacturing companies:
(1) Raw materials
(2) Work in process
(3) Finished goods
Merchandising companies ______ have to distinguish between raw materials, work in process, and finished goods. They report _____ inventory number on their balance sheet labeled __________.
(1) Do not
(2) One
(3) Merchandise Inventory
Materials used to make the product and waiting to be processed.
Raw Materials
Partially completed products but will require further work to be saleable to customers.
Work in Process
Consists of units of product that have been completed, but not yet sold to customers.
Finished Goods
Reported on Balance Sheet
Inventory
Reported on Income Statement
Cost of Goods Sold
Periodic Equation
Beginning Inventory + Purchases - Ending Inventory = COGS
Perpetual Equation:
Beginning Inventory + Purchases - COGS = Ending Inventory
Beginning Inventory + Purchases =
Cost of Goods Sold
Inventory Costing Methods:
(1) Specific Identification
(2) FIFO (First in, first out)
(3) LIFO (Last in, first out)
(4) Weighted Average
Effects of Increasing Costs on the Financial Statements (FIFO)
Inventory (Balance Sheet) - higher
COGS (Income Statement) - lower
** Results in higher gross profit
Effects of Increasing Costs on the Financial Statements (LIFO)
Inventory (Balance Sheet) - lower
COGS (Income Statement) - higher
Effects of Decreasing Costs on the Financial Statements (FIFO)
Inventory (Balance Sheet) -lower
COGS (Income Statement) - higher
Effects of Decreasing Costs on the Financial Statements (LIFO)
Inventory (Balance Sheet) - higher
COGS (Income Statement) - lower
** Results in higher gross profit
Advantages of Weighted Average
Smooths out price changes
Advantages of First-In, First-Out
Ending inventory approximates current replacement cost
Advantages of Last-In, First-Out
Better matches current costs in cost of goods sold with revenues.
When costs are rising, FIFO produces a _______ Inventory value (making the balance sheet appear to be stronger) and a _______ Cost of Goods Sold (resulting in a higher gross profit, which makes the company look more profitable). When costs are falling, these effects are reversed.
(1) Higher
(2) Lower
Inventory Turnover Ratio
COGS / (Average Inventory)
Days to Sell
365 / (Inventory Turnover Ratio)
The number of times inventory turns over during the period (higher = faster).
Inventory Turnover Ratio
Average number of days from purchase to sale (higher = longer time to sell)
Days to Sell
For merchandisers, inventory turnover refers to:
Buying and selling goods
For manufacturers, inventory turnover refers to:
Producing inventory and delivering it to customers
