Chapter 8 Flashcards
inventory overview
asset
intends to sell in the normal course of business
has in production for future sale
or
uses currently in production of goods to be sold
COGS related expense account
types of inventory
merchandise: goods purchased primarily in finished form from wholesalers and retailers
cost of merchandise inventory:
- purchase price plus any other costs necessary to get goods in condition and location for sale
manufacturing inventory: goods that are produced by a manufacturing company to be sold to wholesalers, retailers, other manufacturers or consumers
- consists of:
RM
WIP
FG
perpetual inventory system
continually adjusts the inv account for each change in inventory caused by a:
- purchase
- sale, or
- return of inventory
continually adjusts the COGS each time goods are:
- sold
- returned by a customer
this allows management to determine goods on hand on any date and to determine the number of items sold during the period
perpetual inventory system example:
The Lothridge Wholesale Beverage Company purchases soft
drinks from producers and then sells them to retailers.
The
company begins 2024 with inventory of $120,000 on hand.
The
following information relates to inventory transactions during 2024:
- Additional soft drink inventory is purchased on account at a cost of
$600,000. - Sales for the year, all on account, totaled $820,000.
- The cost of the soft drink inventory sold is $540,000.
Lothridge uses the perpetual inventory system to keep
track of both inventory quantities and inventory costs.
The
system indicates that the cost of inventory on hand at the
end of the year is $180,000
record purchase of inv:
Debit: inventory 600,000
Credit: AP 600,000
record sale account:
Debit: AR 820,000
Credit: SR 820,000
record costs of sales
Debit: COGS 540,000
Credit Inventory 540,000
perpetual inv system technology
nearly all major companies use to record transactions
tech advances help reduce burden of physical inv counts and manual record keeping
automated systems allow for continuous tracking of inv:
- barcode scanning
- radio frequency identification ((RFID) tags
periodic inv system
adjusts the inv account and record COGS only at the end of each reporting period
records merchandise purchases, purchases returns, purchase discounts, and freight-in temporary accounts
determine period’s COGS by combining temporary accounts with the inv account:
COGS = beg inv + net purchases - end inv
The Lothridge Wholesale Beverage Company purchases soft
drinks from producers and then sells them to retailers. The
company begins 2024 with inventory of $120,000 on hand. The
following information relates to inventory transactions during
2024:
1. Additional soft drink inventory is purchased on account at a cost of
$600,000.
2. Sales for the year, all on account, totaled $820,000.
Lothridge uses the periodic inventory system. After a
physical count of inventory at the end of the year, the cost of
ending inventory is determined to be $180,000.
recording purchase of inv:
Debit: purchases
Credit: AP
record sales on account
Debit: AR
Credit: Sales Revenue
no entry is required for cost of inventory sold at the time of sale (cost of inv will be recorded at the end of the year after a physical inventory count
adjusting entry and purchases account, and record COGS
Debit: COGS 540,000
Debit: Inventory (ending) 180,000
Credit: Inv (beg) 120,000
Credit: Purchases 600,000
beg inv + purchases =
cost of good available for sale
comparing perpetual and periodic inventory system: perpetual
1) COGAS is allocated by decreasing inv and increasing cost of goods sold each time goods are sold
2) facilitates the preparation of interim financial statements by providing fairly accurate info without the necessity of physical count of inv
3) more expensive to implement
4) involves the tracking of both inventory quantities and costs
comparing perpetual and periodic inventory system: periodic
1) allocates the COGAS for sale between ending inventory and COGS at the end of the period
2) requires a physical count before ending inventory and COGS can be determined –> makes the preparation of interim financial statements more costly
3) less costly to implement
4) can monitor only inv quantities
physical units included in inventory
items in the possession of the company
goods in transit
goods on consignment
anticipated sales returns
goods in transit
where goods are on the way to their destination
between the suppliers and a company or between the company and its customers
HOW TO ACCOUNT: depends on ownership of goods
goods in transit
FOB shipping point
or
FOB destination
FOB shipping point: In December 2024, the Lothridge Wholesale Beverage Company
sold goods to the Jabbar Company. The goods were shipped from
Lothridge on December 29, 2024, but the goods didn’t arrive at
Jabbar until January 3, 2025
FOB SP
- title transfers at shipping point
- lothridge wuld record sale on Dec 29, 2024
Jabbar includes these goods in its 2024 ending inventory even though the company is not in physical possession of the goods on the last day of 2024
In December 2024, the Lothridge Wholesale Beverage Company
sold goods to the Jabbar Company. The goods were shipped from
Lothridge on December 29, 2024, but the goods didn’t arrive at
Jabbar until January 3, 2025
FOB D
title transfers at destination
Lothridge includes the goods in
its 2024 ending inventory and
the sale is not recorded until
January 3, 2025, when those
goods reach Jabbar.
- Jabbar waits until 2025 to record
the purchase
`sales returns
when customers return merchandiseL
1) COGS is reduced
2) inventory is increased (also revenue and AR are reduced)
same adjustment is made at the end of the period to account for estimated sales returns in the future
sooooooo
company includes in ending inventory the cost of inventory sold that it anticipates will be returned
goods on consignment
transferor (consignor) legally retains the title of goods even though the consignee holds them in the store (consignor physically transfers the goods)
if the buyer is not found - goods are returned to the consignor
if the buyer is found - the selling price (less commission and approved expenses) is remitted to the consignor
accounting treatment:
- goods held on consignment are included in the inventory of the consignor until sold by the consignee
- sale is recorded by consignor only when the goods are sold by the consignee and title passes to the third party
journal entry for estimated return
Debit: estimated returns
Credit: Refund liability
Debit: Inventory
Credit: COGS
NOTE: differing entries depending on adjustment that needs to fix understated or overstated
transactions affecting net purchases
costs of inventory includes necessary expenditures to:
1) acquire the inv
2) bring it its desired condition and location for sale or for use in the manufacturing process
- common costs included in inv are:
1) freight charges on incoming goods
2) insurance costs during transit
3) costs of unloading, unpacking, preparing merchandise inv
purchase returns and purchase discounts REDUCE the cost of net purchases
net purchases = total purchases + freight and other costs - returns and discounts
freight-in on purchases
costs to get the inv in location for sale or use
- perpetual: ADD to inventory account
- Periodic: freight costs are added to temporary account = freight in/transportation in (later added to purchases
shipping charges on outgoing goods
costs are not included in the cost of inventory
- treated as a part of COGS or as an operating expense
- if not in COGS amounts incurred and income statement classification must be disclosed
purchase returns
buyer views a purchase return as a reduction of purchases
perpetual inv system: return of inv previously purchased on acct is recorded as:
- reduction in both inv and AP
- if original purchase was for cash, then increase cash for refund
periodic inv system:
- purchase returns acct used to accumulate the amount of return
- purchase returns are then subtracted from total purchases to calculate net purchases
purchase discounts: represents reduction in the amt to be paid by the buyer if remittance is made within a designated period of time —> Gross Method
record purchase of inv:
Debit Inventory 20,000
Credit: AP 20,000
Record payment within period:
Debit: AP 14,000
Credit: Inv 280
Credit: Cash 13720
if remaining amount is paid after discount period:
Debit: AP 6,000
Credit: Cash 6,000
purchase discounts: represents reduction in the amt to be paid by the buyer if remittance is made within a designated period of time —> Net Method
record purchase of inv:
Debit Inventory 19,600
Credit: AP 19.600
Record payment within period:
Debit: AP 13,720
Credit: Cash 13720
if remaining amount is paid after discount period:
Debit: AP 5880
Debit: purchase discount lost 120
Credit: Cash 6,000
