Inventories Flashcards
perpetual inventory system
maintain detailed records of the cost of each inventory purchase and sale und records continuously
periodic inventory system
do not keep detailed records of the goods on hand. The cost of goods sold determined by count at the end of the accounting period
FOB shipping point
ownership passes to buyer when the carrier accepts the goods form the seller, the purchaser pays freight costs
FOB destination
ownership passes to purchaser at the delivery, seller pays freight costs
purchase return
return goods for credit or cash refund, if the purchaser is dissatisfied with goods because there are damaged, defective, of inferior quality or do not meet specifications
purchase allowance
purchaser choose to keep the merchandise if the seller grant an deduction from the price
purchase discount
credit terms may permit buyer to claim a cash discount for prompt payment
physical inventory
involves counting, weighing or measuring each kind of inventory on hand
goods in transit
should be included in the inventory of the company that has the legal title to the goods
consigend goods
goods held for sale by one party, ownership of the goods is retained by another party
acutal physical flow costing method
items still in inventory are specifically costed to arrive at the total cost of the ending inventory, practice is relatively rare
FIFO
first in first out, earliest goods purchased are first to be sold
average cost
allocates cost of goods available for sale on the basis of weighted-average unit cost incurred
Cost flow methods
should be used consistently, enhances comparability
lower-of-cost-or-net reliazable value
companies must write down the inventory to its net realizable value in the period in which the price decline occurs
et realizable value
net amount that a company expects to receive form sale of inventory
Causes for inventory errors
- failure to count or price inventory correctly
- not properly recognizing the transfer of legal title to goods in transit
consequenses of inventory Errors
Errors affect both income statement and statement of financial position, because they affect the computation of cost of goods sold and net income in two periods. An error in ending inventory will have reverse effect on net income of the next accounting period. Over two years the total net income is correct because the errors offset each other.
cost of goods sold
= beginning inventory + cost of goods purchased – ending inventory
Inventory turnover
= cost of goods sold / average inventory, measures the number of times on average the inventory is sold during the period
days in inventory
365 / inventory turnover, measures the average number of days inventory is held
Gross profit method
estimates the cost of ending inventory by applying a gross profit rate to net sales:
net sales – estimated gross profit = estimated cost of goods sold
cost of goods available – estimated cost of goods sold = estimated cost of ending inventory
retail inventory method
company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost:
goods available for sale at retail – net sales = ending inventory at retail
goods available for sale at cost / goods available for sale at retail = cost-to-retail ratio
ending inventory at retail * cost-to-retail ratio = estimated cost of ending inventory
