inventory Flashcards
what are the 3 categories of inventory usually reported in the Fin Statements? which company makes this type of division?
Manufacturing companies, on the other hand, distinguish between three categories of inventory.
raw materials: input goods purchased but not yet put in production.
work-in-process: items whose production has been started but has not yet been completed.
finished goods: items whose production has been completed
which costs are excluded from the inventory balance?
Some costs are (in most cases) part of cost of goods sold but are not inventoriable, including
fulfilment costs such as outbound freight; and
fixed procurement costs (warehouses, procurement departments).
These are period costs and are expensed as incurred
which costs are included in merchandise inventory balance?
For merchandise inventory and raw materials, products costs include
the purchase price;
inbound freight costs; and
any reductions related to returns, allowances and discounts
which costs are included in work in progress inventory balance?
Work-in-process and finished goods inventory also include
direct labor costs; and
allocated manufacturing overhead costs (indirect labor and material, depreciation, electricity, insurance, etc.).
(Allocating all fixed manufacturing costs to inventory is known as absorption costing and is the required method under GAAP.)
what are the 2 record keeping methods for inventory?
There are two principal alternatives to track inventory.
Under a perpetual inventory system, the business maintains a current record of all items in inventory. Purchases and sales are recorded as they occur.
Under a periodic inventory system, inventory balances are only determined at the end of each period via physical counts.
what if a periodic physical count yields a different result from that given by the perpetual method?
If an actual physical count at the end of the period yields a difference between the counted balance and the perpetual inventory system balance (e.g., due to unrecorded breakage, theft, or obsolescence), this difference is used to reduce the inventory balance by crediting it against “inventory lost and over”, this item is part of COGS.
how is COGS computed under the periodic system?
we account for purchases in a different account, then at the end of the period we count what’s left in the inventory through a physical count. COGS=initial balance+inventory purchases-final balance.
which are the 4 cost flow methods?
Under any inventory system, companies need to make assumptions about the cost flow, i.e., the order in which the costs of the items in inventory are taken into cost of goods sold.
specific identification: cost of goods sold is the cost assigned in the inventory system to the specific item sold.
first-in-first-out (FIFO): the cost of the oldest purchases currently in inventory is taken into cost of goods sold first.
last-in-first-out (LIFO): the cost of the most recent purchases is taken into cost of goods sold first. (US GAAP only)
(weighted or moving) average cost: cost of goods sold is determined by the average cost of all items currently in inventory.
can you use different cost flow assumptions for different types or items of inventory? what if you use FIFO but actually sell the newest items in the inventory?
yes, it is allowed. The assumed cost flow does not need to match the actual, physical flow of goods.
Old cost bases might be assigned to brand new inventory, and vice versa
when is specific identification used? what are its advantages and disadvantages?
Identifying an item-specific cost for all items in inventory is the most accurate (and often least practical) method. Specific identification is typically used when
the number of items in inventory is small;
inventory items are expensive;
the inventory consists of heterogeneous products;
items involve substantial customization.
which figures of COGS tend to be higher: when using LIFO or FIFO?
LIFO due to inflation.
what is the LIFO reserve?
the difference between inventories when computed using LIFO and FIFO. LIFO companies are obligated to report such number in their notes to allow for comparability.
how to use the weighted average cost method?
compute weighted average cost of inventory unit (weights are units in inventory) and multiply that by the total number of units sold during the period.
what is the lower of cost or market rule?
At times, we might find that some items in inventory cannot be sold at a price above their cost.
In this case, we reduce the inventory balance to the price we expect to receive and recognize the loss immediately. (In accordance with which accounting principle?)
This accounting treatment is called the lower-of-cost-or-market rule.
A write-down to market value can be reversed in later periods under IFRS but not under US GAAP.
what is net realizable value?
The technical term for ‘market value’ is net realizable value (both under IFRS and under US GAAP). Net realizable value equals the expected selling price of the inventory less the cost to complete and sell the item.
