Inventory Flashcards
FOB Destination
The Seller bears all costs ot transporting the goods to the buyer.
Title passes to the buyer when the goods are received at their final destination.
FOB Shipping Point
Buyer is reponsible for shipping costs .
Title passes to the buyer when the carrier recieves the goods.
If the test is silent on whether FOB ship or destination assume it’s FOB Shipping Point.
Purchase Allowance
When you keep the goods even when they’re non-comformant bc the seller gives you a “discount” break on the bill - making the payable smaller.
Inventory Turnover
of times your inventory goes down to 0 during the year, the higher the better.
GOGS/Avg. Inventory
Avg. Invenotory = End Inv. from PY+Ending inventory from CY/2
Number of days’ supply in average inventory
365/Inventory Turnover
of days inventory is held before sale, shows efficiency of inventory policies.
Percentage of Completion Method - Construction Accounting
Income = Cost Incurred to date/Total estimated cost to complete x Profit
Profit = Contract Rev - Total estimated cost to complete.
In the 2 and every year after, you need to subtract the prior year income, bc this is an accumulated amount.
COGS Calculation
Beginning inventory \+COG Purchased =COG Avail for sale - Ending Inventory =COGS
Cost of Goods Purchased Calculation
Gross Purchases -Purchase Discounts -Puchase Returns and Allowances =Net Purchases \+Freight-in or Transport-in =COG Purchased
Net Mothod of accounting for purchases
Any purchases discounts offered are assumed taken and the puchase account reflects the net price.
Purchase $100 discount 2/10 net 30
Dr. Purchases $98
Cr. AP $98
Dr. AP $98
Cr. Cash $98
Discount not taken
Dr. AP $98
Cr. Cash $100
Cr. Purch disc lost $2 Treated as a period cost
Gross method of accounting for purchases
Purchases are recorded at gross then a seperate account “Purchase discount” - contra account to the purchases. Considered to be a product cost.
Don’t take the discount
Dr. AP
Cr. Cash
Take discount
Dr. AP $100
Cr. Cash $98
Cr. Purchase discount $2
Weighted-Average Method (Periodic System)
Seller averages the costs of all items on hand and purchased during the period. The units in ending inventory and units sold (COGS) are costed at this average cost.
First-in-first-out (FIFO)
The goods from beginning inventory and the earliest purchased are assumed to be the first goods to be sold.
FIFO- describes COGS
Ending inventory - LIST - last in still there
B/S focus - better matching for ending inventory
FIFO under periodic and perpetual are the same
Last-In, First-Out (LIFO)
The most recent purchases are assumed to be the first goods sold; thus, ending inventory is assumed is assumed to be composed of the oldest goods.
LIFO- COGS
Ending Inventory - FIST - First in still there
I/S focus - better matching for COGS
Different calc under periodic and perpetual
periodic- doesn’t matter when we made the sale - find COGAS then find ending inventory
perpetual- does matter when you make the sale using the LIFO approach sell the items last in, first.
Moving Average (Perpetual System)
The average cost of goods on hand must be recalculated any time additional inventory is purchased at a unit cost different from the previously calculated average cost of goods on hand.
Determine Market Price (Lower of Cost or Market)
Market Cost = Replacement Cost
Replacement cost has to fall between the ceiling and the floor.
Ceiling
NRV= Sales Price - Cost to complete and dispose of.
Floor = NRV-Normal Profit Margin (% of Sales Price x Sales Price)
If replacement cost falls below the floor, the market is Floor, and if it’s above the ceiling, market will be the ceiling.
If replacement cost falls between the ceiling and floor this is the market value.
Compare the cost vs. the Market (replacement cost).
Lower of Cost of Market (steps to calculate)
- Determine the Market
Replacement cost - limited to the ceiling and floor. - Determin cost
Ending inventory: LIFO, FIFO, Weighted Avg, and moving avg. - Select either the lower of cost or market for each individual item or inventory as a whole.
Methods of recording inventory write-downs
- Dr. COGS
Cr. Inventory
The write down gets lost in COGS, losses aren’t seperately disclosed. - Dr. Loss due to Market Decline
Cr. Inventory
Seperate recognition, treated as a period cost.
Losses on purchase commitments
Result from legally enforceable contracts to purchase specific quantities of goods at fixed prices in the future.
Decline in market below the contract price at B/S date and contracts are noncancellable. Unrealized loss occurs and if material should be recorded on the period of decline.
Dr. Estimated loss on PC
Cr. Accrued loss on PC
Dollar-value LIFO
LIFO applied to pools of inventory items rather than to individual items.
Steps:
1. Nominal EI convert to the Base Year EI
2. Chang in the layer at Base Year prices
3. Convert Base Year layers to Nominal
4. Add up the layers
Find Price index= nominal year/base year
Gross Profit
EI is estimated by using the GP percentage to convert sales to COG Presumed sold.
Not acceptable for tax or annual FS
Used to estimate ending inventory for internal use, interim FS, establishing loss due to destruction of inventory
Net Sales - COGS = GP
Mark up on sales: set sales at 100%(of sales $) and GP at the mark up % (ex. 25%)
Net Sales 100%
COGS- plug 75%
GP 25%
If markup on cost: set COGS at 100% and GP at 25% the plug is net sales at 125%
Consignments
Consignor ships goods to Consignee wo sells them, goods belong to Consignor until sold.
Revenue is recognized by the consignor when goods are sold. Commission paid to the consignee is a selling expense, can not be netted against sales revenue.
Completed-contract method
Recognition of contract revenue and profit at contract completion.
Advantages- based on results not estimates
Disadvantages - current performance is not reflected and income recognition may be irregular.
Percentage-of-completion
Recognition of contract revenue and profit during construction based on expected total profit and estimated progress towards completion in the current period.
Advantage - periodic recognition of income
Disadvantage - dependence on estimates
Loss under Completed contract method or Percentage of Completion
If a loss is noticed during Year 2 of a 3 year contract, loss is recognized in the year that it becomes apparent. (Conservatism)
