Inventories Flashcards
Performing a Stocktake
periodic inventory = cost of inventory purchased during the period is recorded in the Purchases account
perpetual inventory = a physical stocktake is still done at least once a year to verify the balances recorded in the accounting records
Transfer of Ownership
to qualify as an asset of the business, the inventory need only be controlled by the business and not necessarily owned
the seller is responsible for paying the freight and title usually does not transfer until delivery is made to the buyer
sales are normally recorded when shipment is made and purchases are recorded when the inventory is received irrespective of the shipping terms
Goods on Consignment
a consignment is a selling arrangement whereby a business ships goods to a dealer or agent who agrees to sell the goods on behalf of the consignor for a commission
part of the consignor’s inventory even though physical possession of the goods is with the consignee
the goods are excluded from the inventory of the consignee since they remain under the control and ownership of the consignor
Cost of Inventory
the sum of all direct and indirect costs — costs of purchase, costs of conversion, and other costs — incurred in bringing the merchandise to a saleable condition and to its existing location
Cost Flow Assumption Methods
in order to measure the cost of sales expense, the allocation of total inventory cost must be based on a cost flow assumption
specific identification
first‐in, first‐out (FIFO)
last‐in, first‐out (LIFO)
average cost
Specific Identification
requires each unit sold and each unit on hand to be identified with a specific purchase invoice
FIFO
based on the assumption that the cost of the first units acquired is the cost of the first units sold
LIFO
the cost of last units purchased is assumed to be the cost of first units sold
Average Cost
calculated by dividing the total cost of goods available for sale, including the cost of the beginning inventory and all net purchases, by the total number of units available for sale
this weighted average is then multiplied by the number of units available for sale to determine the cost of the ending inventory
Comparison of Inventory Systems
the values obtained with the specific identification method are the same because the units identified as sold are the same under both inventory systems
when the LIFO method is used, both the ending inventory and cost of sales dollar amounts may vary between the perpetual and periodic systems
Lower of Cost and Net Realisable Value Rule
inventories must be valued at the lower of cost and net realisable value
net realisable value is the estimated selling price in the normal course of business less the estimated costs of completion and the estimated costs necessary to make the sale
FIFO Returns Method
purchases returns are shown on the inventory record at the negotiated price
for sales returns, they are costed back into inventory at the most recent cost price that had been attached to the sale
Average Cost Returns Method
a new average cost per unit is calculated after each purchase and also after each purchase return in order to keep the moving average up to date
the purchase return is recorded on the inventory record at the actual price negotiated with the supplier and not at the moving average price
Inventory Errors
under a periodic inventory system, errors may occur in counting and pricing the inventory and in the failure to use the proper cut‐off dates for recording purchases and sales
Estimating Inventories
perpetual = inventory is determinable from accounting records
periodic = inventory calculated from cost of sales
the retail inventory method and the gross profit method are two approaches that can be used to estimate the dollar amount of unsold goods without a stocktake
