Chapter 8 Flashcards
Q: What types of companies have inventory?
Retailers/Wholesalers: Purchase merchandise ready to sell; unsold units on hand are recorded as merchandise inventory.
Manufacturing Companies:
Raw Materials
Work in Progress (WIP)
Finished Goods (FG):
How do companies plan and control inventory?
Inventory Planning:
Ensure sufficient inventory to avoid stock-outs but not excessive inventory.
Maintain a wide variety of products.
Inventory Control:
Avoid excessive carrying costs (storage, insurance, obsolescence, risk of theft or damage).
Too little inventory can lead to stock-outs and lost sales.
Carefully monitor inventory levels to balance the costs and avoid issues.
What information do external users need regarding inventory?
The existence and classification of different types of inventory.
Inventory Management: How management is controlling and overseeing inventory.
Measurement of Inventory: How inventory has been measured and valued.
How is Cost of Goods Sold (COGS) calculated
Beginning Inventory + Purchases/Manufactured - Ending Inventory = COGS.
This formula helps determine the cost of goods that have been sold during the period.
What considerations are made when determining the Cost of Ending Inventory?
Physical Goods to Include: Which goods should be counted in inventory.
Cost Formula: How to calculate the cost of inventory.
Impairment: How to account for any impairment in value of inventory.
How is inventory defined?
Assets: Inventory is considered an asset.
Held for Sale: In the ordinary course of business (Finished Goods).
In Production: For sale (Work in Progress).
Raw Materials: To be consumed in production or services.
Future Benefit: Inventory provides future benefit to the entity once control/access is established.
Purchase Recognition: Recognized as an asset when the risks and rewards of ownership pass to the purchaser.
What goods are included in inventory?
Legal Title: The right to sell or pledge inventory.
Possession: The right to use the inventory.
Purchases: Recognized when goods are received (not necessarily when ownership passes).
Exceptions: Goods in transit, consigned goods, repurchase agreements, and purchase commitments may complicate when inventory is recognized.
What are common inventory errors?
Not recording a purchase but counting it in inventory.
Not recording a sale in the current period, even if items were delivered.
Failing to adjust inventory to the lower of cost and net realizable value.
Prior period errors are corrected as adjustments to retained earnings.
What costs are included in inventory measurement?
Cost of Purchases: Includes actual product cost, transportation, handling, and taxes/duties.
Cost of Conversion: Direct labor (DL), manufacturing overhead (MOH), and fixed costs.
Other Costs: Costs incurred to bring inventory to its current location/condition.
How are volume rebates recorded in inventory?
Volume rebates are reduced from purchase cost.
Recognized before receipt if:
The rebate is non-discretionary.
Terms are likely to be met.
Amount can be reasonably estimated.
Receivables are proportional to the total expected rebate.
What are product costs in inventory measurement?
Direct Costs: Related to bringing goods to business and making them saleable.
Asset Retirement Costs (IFRS).
Taxes: Excluding recoverable taxes (e.g., GST, HST).
Conversion Costs: Direct labor, fixed overhead based on normal production capacity.
Buying Costs: Expenses of the purchasing department, insurance, transit handling.
How are borrowing costs treated in inventory measurement?
IFRS: Interest costs for items that take a long time to produce are included in product costs.
ASPE: Companies have a choice, but full disclosure is required if interest is capitalized.
What are standard costs in inventory measurement?
Set based on expected material, labor, and overhead costs under normal conditions.
Variances are recorded when actual costs differ from standard costs.
Inventories can be reported at standard cost if it closely matches actual cost.
Unallocated overhead is expensed when incurred.
How is Work-in-Progress (WIP) measured for service providers?
Personnel and related overhead costs for services in progress.
Allocated overhead similar to manufacturing.
WIP is measured at production cost.
How are basket purchases of goods measured?
Goods with different characteristics purchased together for one price.
The total cost is allocated based on the relative sales values of the items.
What costs are excluded from inventory?
Storage costs (unless part of the production process).
Abnormal spoilage or wastage.
Interest costs on delayed payment terms.
Period costs: Selling, general, and administrative expenses.
What is the perpetual inventory system?
Continuously tracks inventory and COGS.
Purchases, sales, returns, and allowances are recorded directly in the inventory account.
Maintains a subsidiary ledger for inventory items.
What is the periodic inventory system?
Inventory counted periodically (physical inventory).
COGS determined at the end of the period: Beginning Inventory + Purchases - Ending Inventory = COGS.
Purchases and returns recorded in separate accounts.
