Inventory Flashcards
Cost of Inventory
Includes all cost of acquisition and preparation for sale:
- Warehousing costs prior to sale
- Insurance, repackaging, modifications
- Freight-in paid by the buyer
- Transportation costs paid by the seller on consignment arrangements
- DO NOT include abnormal costs for idle factory expenses, unallocated fixed overhead cost, excessive spoilage, double freight, and re-handling costs (these should be expensed immediately).
FOB Shipping Point
Title passes to the buyer when the seller delivers the goods to a common carrier (shipped). Included in buyer’s books at year end.
FOB Destination
Title passes to the buyer when the buyer receives the goods from the common carrier (received). Included in seller’s books until received by buyer.
Consignor
- Includes inventory in his balance sheet
- has ownership but not possession of the goods
- cost incurred by consignor in transferring goods to the consignee are considered inventory costs until sold.
Consignee
- Items are not included in his inventory balance
- has possession but not ownership of goods.
- when sold, the sales price is given to the consignor after deducting any reimbursable costs and commissions earned by the consignee
Cost of Goods Sold (COGS)
Beginning Inventory \+ Net Purchases = Goods Available for sale - Ending Inventory =Cost of Goods Sold
Operating Income
Sales - COGS = Gross Margin - SGA = Operating Income
Periodic Inventory System
Physical inventory count. Inventory quantity is determined by a physical count usually done at year end.
- Inventory purchases are debited to purchases.
- No adjustment is made to inventory until the end of the period, when a physical inventory count is made and ending inventory is calculated
- COGS is the plug and the exact amount of inventory shortages cannot be determined since it is buried in COGS
Perpetual Inventory System
(ongoing, real-time count)
- Inventory purchases are debited to inventory. The quantity on hand can be determined at any point in time.
Specific Identification
Must be able to identify each unit sold. Used when inventory is few in number, very expensive and can be clearly identified, very heterogeneous items.
FIFO: First-in, First-out (LISH)
The inventory on hand is presumed to consist of the most recent purchases. In periods of rising prices, FIFO results in the highest inventory, lowest cost of goods sold and the highest net income.
- Perpetual and periodic inventory systems are the same.
LIFO: Last-in, First-out (FISH)
The most recent cost are expensed and matched with current revenues. The inventory remaining on hand is presumed to consist of the goods acquired first. In periods of rising prices LIFO results in the lowest ending inventory, highest cost of goods sold and the lowest net income.
- Better represents the flow of cash
- Perpetual and periodic inventory systems are different.
Average Inventory Methods
Assign the same unit price to similar goods available during the period.
Perpetual (Moving Average)
This method computes the average after each purchase
Periodic (Weighted Average)
This method takes total costs of all inventory purchases during the year and divides them by the total number of inventory units available during the year.
