INVENTORIES Flashcards
What are inventories?
Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services.
What types of goods are included in inventories?
Inventories encompass goods purchased and held for resale, such as merchandise purchased by a retailer and land held for resale by a subdivision entity.
How are inventories classified?
Inventories are broadly classified into two categories: inventories of a trading concern and inventories of a manufacturing concern.
What is merchandise inventory?
Merchandise inventory refers to goods held by a trading concern that buys and sells goods in the same form purchased.
What constitutes a manufacturing concern?
A manufacturing concern buys goods which are altered or converted into another form before they are made available for sale.
What are the types of inventories in a manufacturing concern?
The inventories of a manufacturing concern include finished goods, goods in process, raw materials, and factory or manufacturing supplies.
What are finished goods?
Finished goods are completed products that are ready for sale.
What are goods in process?
Goods in process are partially completed products which require further processing before they can be sold.
What are raw materials?
Raw materials are goods that are to be used in the production process, with no work or process having been done on them yet.
What are factory or manufacturing supplies?
Factory or manufacturing supplies are similar to raw materials but their relationship to the end product is indirect.
What is the general rule for goods includible in inventory?
All goods to which the entity has title shall be included in the inventory, regardless of location.
What does ‘passing of title’ mean?
‘Passing of title’ refers to the point in time at which ownership of goods changes.
How are consigned goods treated in inventory?
Consigned goods are included in the inventory of the consignor, not the consignee.
What are the freight terms related to ownership in transit?
Ownership of goods in transit depends on the terms, FOB destination or FOB shipping point.
What does FOB destination mean?
Under FOB destination, ownership is transferred only upon receipt of the goods by the buyer at the point of destination.
What does FOB shipping point mean?
Under FOB shipping point, ownership is transferred upon shipment of the goods.
What does freight collect mean?
Freight collect means that the freight charge on the goods shipped is not yet paid and will be collected from the buyer.
What does freight prepaid mean?
Freight prepaid means that the freight charge on the goods shipped is already paid by the seller.
What is FAS in maritime shipping terms?
FAS or free alongside means the seller bears all expenses and risk involved in delivering the goods to the dock next to the vessel.
What does CIF stand for?
CIF stands for Cost, Insurance, and Freight, where the buyer agrees to pay a lump sum for the cost of goods, insurance, and freight.
What is the periodic inventory system?
The periodic inventory system computes the cost of goods sold at the end of the reporting period by deducting physical inventory from the cost of goods available for sale.
What is the perpetual inventory system?
The perpetual inventory system maintains records called stock cards that provide a running summary of inventory inflow and outflow.
What is the purpose of trade discounts?
Trade discounts are deductions from the price to encourage trading or increase sales.
What are cash discounts?
Cash discounts are deductions from the invoice price when payment is made within the discount period to encourage prompt payment.
What is the gross method of recording purchases?
Under the gross method, purchases and accounts payable are recorded at the gross amount of the invoice.
What is the net method of recording purchases?
Under the net method, discounts are deducted in advance, and purchases and accounts payable are recorded at the net amount of the invoice.
What comprises the cost of inventory?
The cost of inventory includes the cost of purchase, cost of conversion, and directly attributable costs incurred in bringing the inventory to its present location and condition.
What is included in the cost of purchase?
The cost of purchase includes the purchase price, import duty, irrecoverable tax, freight, handling, and other costs directly attributable to acquisition.
What is the cost of conversion?
The cost of conversion includes costs directly related to production, such as direct labor and systematic allocation of fixed and variable production overhead.
What are directly attributable costs?
Directly attributable costs are incurred in bringing the inventory to its present location and condition intended for sale.
What costs are recognized as expenses when incurred?
Abnormal amounts of wasted material, storage costs, administrative overhead, and distribution or selling costs are recognized as expenses when incurred.
