Inventory Flashcards
Which costs are inventoriable?
- Purchases - Net of Discounts
- Freight In paid by the Buyer
- Warehouse expenditures
- Insurance, Repackaging
- Transportation costs paid by seller on consignments
When does ownership of goods transfer when shipped FOB Shipping Point?
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
When does ownership transfer when goods are sent FOB Destination?
FOB Destination keeps the items in the seller’s inventory until it reaches the buyer
Which costs are non-inventoriable?
Sales Commissions Interest on liabilities to vendors Shipping expense to customers Abnormal costs for idle factory expenses Financing costs
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not.
Unused discounts are allocated to financing expense.
This is the most acceptable method.
How is gross margin calculated?
Gross Margin : Sales - COGS (BI + P - EI)
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period
Weighted-average cost flow method is used.
Describe the perpetual inventory system.
Inventory count continually updated
Uses a moving-average cost flow method
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
How is inventory turnover calculated?
COGS / Average Inventory
How is Average Day’s Sales in inventory calculated?
365 / Inventory Turnover
Under a consignment system, who holds the consigned goods in inventory?
The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee, warehousing costs, in-transit insurance.
How does misstatement of ending inventory effect Ending Retained Earnings?
EI Over : COGS Under : ERE Over
EI Under : COGS Over : ERE Under
Which costs are included in COGS first under the FIFO (first in first out) system?
The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1. This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes
Which costs are included in COGS under the LIFO (last in first out) system?
The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units : Weighted Average Cost Per Unit
How does FIFO change in a period of rising prices?
FIFO has the Lowest COGS
FIFO is a cat that sees a mouse starts Low and is Rising
If COGS is Low, that means EI is High
How do FIFO change in a period of falling prices?
FIFO has the Highest COGS
Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch
If COGS is High, that means EI is Low
Under a Lower of Cost or Market, how are the benchmarks calculated?
Market Ceiling : Net Realizable Value : Selling Price - Selling Costs
Market : Replacement Cost
Market Floor : Net Realizable Value - Normal Profit
FIFO Characteristics:
- Inventory on the books is considered most recent purch.
- FIFO results in highest ending inventory
- Lowest COGS
- Highest Net Income
- Closely relates to actual flow of goods
- Perpetual and Periodic are the same
LIFO Characteristics:
- Most recent costs are expensed and matched with current revenues (matching)
- Inventory on books is considered to be goods acquired 1st
- In periods of rising prices - LIFO = lowest ending inventory, highest COGS, and lowest Net Income
- Better represents flow of cash
- Perpetual and Periodic are different
What is the purpose of LIFO for financial reporting purposes?
-LIFO is an attempt to approximate the replacement cost
-Known as the Capital Maintenance Concept - presumes that a company that wishes to remain a going concern must maintain a basic level of investment in the assets that comprise the business
-True cost of of an item that has been sold is the cost of replacing the inventory
(LIFO is as close as that)
When costs are increasing, which method understates costs of goods sold (overstating net income)?
FIFO
When costs are increasing, which method understates inventory?
LIFO
Moving Average (Perpetual)
Computes average after each purchase
Dollar Value LIFO:
- related items are grouped in pools
- an overall price index is used to appx. changes in invent.
Benefits of using Dollar Value LIFO vs LIFO
- only necessary to track annual layers of costs and price indexes for each inventory pool, instead of detailed
- reduces the possibility that older inventory layers will be liquidated and reported in COGS - since reductions in one type of inventory will be offset by another type
Two Figures needed to configure Dollar Value LIFO
Total Current Cost of inventory in the pool at the EOY (replacement cost or ending inventory under FIFO)
Price Index indicating overall price level compared to the base date
What accounting principle does reporting inventory at lower of cost or market abide by?
Conservatism
Commissions paid to consignees are recorded as what on the Income Statement?
Selling Expense
If Ending Inventory is understated, what is the affect on Net Income?
Net Income will be understated because COGS is overstated:
Beg + Purchases - Ending = COGS
