Inventory Flashcards
Periodic and Perpetual inventory
Perpetual - sophisticated system that updates as purchases are made, you know inventory balances at all times
Periodic - starting balance is carried on the books all year
Periodic inventory debit what
D. Purchases
C accounts payable
No changes to the inventory balances
End of period periodic counting, you close the purchases account
D inventory
C purchases
Calculating “costs of goods purchased” periodic… you have to figure cost of goods purchased to get to costs of goods sold
Used for calculating periodic inventory
Gross purchases
Minus returns and discounts
Add Freight in (no freight out)
Equals cost of goods purchased
Costs of good SOLD formula
Beginning inventory
Add purchase - cost of goods purchased
Equals Total available for sale
Subtract any inventory written off
Subtract ending inventory
Equals cost of goods SOLD
Perpetual JV
D inventory
C accounts payable
( no “purchases” account)
When you have a sale under perpetual- it takes 2 JVs
D accounts receivable
C sales
D costs of good sold
C inventory
Under periodic- you wouldn’t know what was stolen, only that something was
Isn’t as accurate as perpetual
FOB shipping point
The item after the B designates when the buyer assumes responsibility
Goods belong to the buyer in transit- title passes when it leaves the dock
Buyer pays shipping and it is called Freight In - this is part of the cost of the purchase
FOB destination
Goods belong to the seller until the buyer receives the items (till they reach their destination)
Seller pays shipping and it is considered Freight Out
If ending inventory is overstated then gross profit is overstated - they are connected - direct relationship
Inventory is a current asset so if it was overstated then current assets are overstated too
Ending inventory too high means
Cost of goods sold is too low
Inverse relationship
Overstatement of COGS means
Understatement of net income
Understatement of net income means understatement of retained earnings
Valuation of lower of cost or Net Realizable Value - what is NRV?
Used with FIFO
NRV is Selling price minus cost to dispose (or further processing costs)
Cost is just the cost ( not the replacement value)
Lower of cost or Market (only used with LIFO)….what is market?
First look at the replacement cost
Then look at the ceiling and floor
Ceiling is the NRV
Floor is the ceiling minus the profit margin
Market has to be in the middle
FIFO….sell the oldest goods first
Thus, Balance sheet will have the most recent purchases
This means balance sheet would closely reflect the replacement cost
Won’t matter whether you use periodic or perpetual
LIFO prohibited under IFRS
Under FIFO more cost onto the balance sheet and less on the income statement
In a period of rising prices
Ending inventory is higher
Cost of goods sold is lower
Net income is higher
In a period of rising prices LIFO
Balance sheet inventory is lower (older items)
Cost of goods sold would be higher
Net income would be lower
When calculating LIFO
Calculate total goods available for sale
Then cost of goods sold
Then subtract the two to get remaining inventory
Dollar Value LIFO factors in?
Inflation
You calculate the “LIFO inventory layer” (this is IF inflation affects the beginning balance)
1 Divide ending inventory by the given price index… example 1.10
2 Subtract that from begin inventory
3 new amount gets multiplied by the price index to get the lifo layer
Dollar value ending inventory
Add the lifo layer to the beginning inventory to get the new ending inventory
If the purchases are affected by inflation then multiply the purchases by the percent increase and then add that total to the beginning inventory
Weighted average inventory
Take total cost of available for sale divide by total units for sale
Moving average is used for perpetual
Moving average changes after each sale because the average is recalculated
Inventory turnover ratio
Cost of goods sold divided by
Average inventory
LIFO will normally result in the lowest ending inventory
First in first out results in lower prices sold first and higher ending inventory
Last in first out results in higher prices sold first and lower ending inventory
Understatement of inventory means
Overstatement of COGS
Understatement of net income and retained earnings
(Don’t forget to include the tax calculation in the figures)
Inventory calculations include costs needed to get the item in a state when it is ready to be sold
Direct and indirect materials
Overhead - ex: insurance on equip
Not advertising
Ending inventory and gross profit are directly related
If ending inventory is up then gross profit is up
If you overstate ending inventory then you overstate gross profit
Ending inventory and cost of goods sold are inversely related
Ending inventory is up then cost of good sold is down
Cost of good sold is down then profit is up
Beginning inventory and ending inventory are opposites (inverse)
Beginning inventory is directly related to
Cost of goods sold
Beginning inventory directly related to
Ending inventory directly related to
Beginning is related to COGS
Ending is related to gross profit
Ending is overstated by 3K
Beginning is overstated by 9K
Cost of goods sold is
Ending is inverse to COGS understated by 3
Beginning is direct to COGS so overstated by 9
Overall overstated by 6
If ending inventory is overstated
The effect is
Gross profit is overstated
Net income overstated
Stockholder equity overstated
Retained earnings overstated
Current assets overstated
COGS UNDERSTATED
With consignment - the freight charge
Is included in the inventory balance calculations
Periodic and perpetual will always result in the same dollar amount of ending inventory with
FIFO
Purchase agreement for inventory and the price changes, you record:
If a set amount of units is pledged- you do an entry for the amount of the price change
If no set amount of units is pledged- no entry
