Chapter 8 Flashcards
Inventory Accounts for Merchandiser vs Manufacturer
for merchandiser:
(1) merchandise inventory
for manufacturer:
(1) raw materials
(2) work in process
(3) finished goods
What is Inventory
an asset that is held for sale in the ordinary course of business or for the production of such inventory (including raw materials, work in process, and supplies); inventory is included on the SFP of the entity that has substantially all of the risks and rewards of ownership (generally the entity with possession and legal title)
Effect of Inventory Errors on Financial Statements
(1) an overstated inventory causes an overstated net income and working capital (and vice versa)
(2) if inventory is counted but not expensed, net income will also be overstated
(3) this affects retained earning and inventory on the balance sheet; retained earning must be corrected in the year following an error; if uncorrected and inventory is counted correctly the following year, the effects will cancel out and the balance sheet will be correct
(4) if inventory is not counted or recorded as a purchase, there is no effect on net income, but the current ratio is overstated (assuming greater than 1)
What are the Components of Inventory Cost
all costs of purchase, conversion and other costs incurred in bringing the inventories to the present location and condition necessary for sale (includes freight charges, labour, and an allocation of overhead costs based on normal capacity)
Perpetual Inventory System
a continuous record of changes in inventory is maintained in the inventory account; purchases into and transfers of goods out of the account are recorded directly in the inventory account as they occur
Periodic Inventory System
year-end inventory is determined by a physical count, and the amount of ending inventory and cost of goods sold is based on this count
Specific Identification Method
used to assign costs for items of inventory that are not ordinarily interchangeable or that are produced for specific projects
Average Cost Formulae
the weighted average cost method takes into account the volume of goods acquired at each different price in a periodic system; a moving average cost is used with a perpetual inventory record that is kept in both units and dollars (a new average unit cost is calculated each time a purchase is made)
First-in, First Out Cost Formula
FIFO assigns costs based on the asumption that inventory is used in the order in which it is purchased; the end result of FIFO is the same for a perpetual and periodic system
Lower of Cost and Net Realizable Value Principle
current assets should not be reported on the SFP at a higher amount than the net cash that is expected to be generated from their use or sale; when this amount is less than “cost” inventory is written down and a loss is recognized
Gross Profit Method
ending inventory is determined by deducting an estimate of COGS from the actual cost of goods available for sale; COGS is estimated by multiplying net sales by (100% - gross profit percentage)
Retail Method of Estimating Inventory
the retail price of ending inventory is converted to an estimate of cost using a cost-to-retail percentage (total goods available for sale at cost divided by total goods available for sale at retail)
Account for a Volume Discount Received by a Retailer on Merchandise Inventory
[IFRS/ASPE]
volume rebates are recorded as a reduction of the purchase cost of inventory, and is recognized before it is received proportional; the FULL REBATE is proportioned between all of the units that have and will be purchased; at the time of recognition this results in a credit to COGS and Inventory
Rebate Receivable [debit]
Inventory [credit]
COGS [credit]
