Inventory Flashcards
goods available for sale or use
is the sum of (1) the cost of the goods on hand at the beginning of the period, and (2) the cost of the goods acquired or produced during the period.
cost of goods sold
is the difference between (1) the cost of goods available for sale during the period, and (2) the cost of goods on hand at the end of the period.
True or False: Who owns the goods, as well as the costs to include in inventory, are essentially accounted for the same under IFRS and GAAP.
true
A company reports the cost assigned to goods and materials on hand but not yet placed into production as
raw materials inventory.
At any point in a continuous production process, some units are only partially processed. The cost of the raw material for these unfinished units, plus the direct labor cost applied specifically to this material and a ratable share of manufacturing overhead costs, constitute the
work in process inventory
Companies report the costs identified with the completed but unsold units on hand at the end of the fiscal period as
finished goods inventory.
A perpetual inventory system continuously tracks changes in the Inventory account. That is, a company records all purchases and sales (issues) of goods directly in the Inventory account as they occur. The accounting features of a perpetual inventory system are as follows.
- Purchases of merchandise for resale or raw materials for production are debited to Inventory rather than to Purchases.
- Freight-in is debited to Inventory, not Purchases. Purchase returns and allowances and purchase discounts are credited to Inventory rather than to separate accounts.
- Cost of goods sold is recorded at the time of each sale by debiting Cost of Goods Sold and crediting Inventory.
- A subsidiary ledger of individual inventory records is maintained as a control measure. The subsidiary records show the quantity and cost of each type of inventory on hand.
f.o.b. shipping point
title passes to the buyer when the supplier delivers the goods to the common carrier, who acts as an agent for the buyer
f.o.b. destination title passes to Walgreens only when it receives the goods from the common carrier.
title passes to the buyer only when it receives the goods from the common carrier.
Goods out on consignment are the property of the
consignor (seller)
Who should report the inventory and liability in a Sales with Buyback Agreement?
These arrangements are often described in practice as “parking transactions.” In this situation, Company A simply parks the inventory on Company B’s balance sheet for a short period of time. Generally, when a repurchase agreement exists, Company A should report the inventory and related liability on its books. The reason? Company A has retained the risks and rewards of ownership.
Sales with High Rates of Return
In industries such as publishing, music, toys, and sporting goods, formal or informal agreements often exist that permit purchasers to return inventory for a full or partial refund. When a company can reasonably estimate the amount of returns, it should consider the goods sold but establish a return liability for the amount of the estimated returns. Conversely, if returns are unpredictable, the company should not consider the goods sold and it should not remove the goods from its inventory.
What would happen if IBM correctly records its beginning inventory and purchases, but fails to include some items in ending inventory?
On the balance sheet:
Inventory, retained earnings, working capital and the current ratio would all be understated.
On the Income statement:
Cost of goods sold would be over stated but net income would be understated.
If cost of goods sold is overstated, then
net income is understated.
If ending inventory is understated,
working capital (current assets less current liabilities) and the current ratio (current assets divided by current liabilities) are understated.
