Introduction to Inventory

Question 1

What do you need to know?

Answer 1

• What costs are included in inventory
• How to assign to inventory
• How to calculate COGS
• The impact of errors in inventory on the F/S

Question 2

What is included in ending inventory?

Answer 2

Any merchandise owned by the entity

All costs to bring the inventory to sale (freight, insurance in transit, taxes, packaging, etc)

Goods on consignment:
Consigned goods are owned by the consignor

Question 3

Inventory includes:

Answer 3

Items held for resale (retailer)

Items in process of production (finished goods, work in process, and raw materials)

Items consumed in production (Material, Labor, and Overhead)

Question 4

What are costs included in cost of inventory

Answer 4

Purchase Returns (Yes)
Freight- In (Yes)
Freight- Out (NO, this is a selling expense)
Interest on purchase (No this is a result of financing)
Sales tax on inventory purchases (yes)
Packaging costs (Yes)
Insurance on transit (Yes)

Question 5

what is Free On Board (FOB)?

Answer 5

“Free” indicates who does not have risk.

FOB Origin (Risk of loss is with the buyer and costs of freight)

FOB Destination (Risk is with the seller and “free” to the buyer)

Question 6

How do you calculate cost of goods manufactured?

Answer 6

COGM + Beginning Inventory - Ending Inventory = COGS

Question 7

If a company takes purchase discounts, should those be included in the inventory balance?

Answer 7

Yes– Purchase discounts should be included in inventory. Purchase discount NOT taken should not be included.

Question 8

What is considered normal capacity of production facilities?

Answer 8

Average production volume