Inventory Flashcards
Inventory
core of business operating asset
types held for resale
retail (finished goods only)- resold in substantially the same form in which it was purchased- like walmart
manufacturer: raw materials (inventory being held for use in production process)
work in process (inventory that is in production but incomplete)
finished goods (inventory in production that is complete and ready for sale)
Goods and materials to be included in inventory
general rule is that the goods and materials in which the company has legal title should be included in inventory; and this legal title generally occurs after the possession of goods
inventory
current asset
goods in transit
title passes based on conditions agreed upon by the parties
if no conditions explicitly agreed upon ahead of time, title passes to buyer at the time and place where the seller’s performance regarding the delivery of goods is complete
f.o.b
free on board; requires seller to deliver goods to location determined as FOB ON THE SELLER’S EXPENSE
Goods in transit**
WHO ARE WE? buyer or seller
FOB shipping point
think of amazon
buyer pays
once the seller’s ships the good or delivers it to the common carrier, included in buyer’s inventory upon shipment
buyer is in LA and seller is in new york the moment seller puts the goods in the truck in new york buyer owns it;
it is freight in for the buyer, adds to the cost of inventory; buyer’s inventory
FOB destination
seller pays
title passes to buyer when buyer receives good from carrier
title transfers in la in the example above
freight out: selling expense; seller’s inventory
shipment of non conforming goods
if seller ships wrong goods they belong to the seller once rejected by the buyer
should be included in seller’s inventory
ALWAYS
sale with a right to return
1) CAN YOU REASONABLY ESTIMATE RETURNS?
General rule: sold goods, buyer has the right to return, should be included in seller’s inventory IF the amounts of goods likely to be returned cannot be estimated; cannot record sales cogs etc
if the returns can be reasonably estimated, transaction will be recorded as sale with an ALLOWANCE for returns;
revenue from a sale where customer has right to return shall be recognized at time of sale
IF ALL THE CONDITIONS ARE MET:
sale price substantially fixed at date of sale, buyer assumes risk of loss; buyer has paid some form of consideration; product sold is subs complete; amount of future returns can be reasonably estimated
if returns can be reasonable estimated
transfer of title has happened already
consigned goods
consignor : true owners
consignee: selling agent
inventory cost or COGS: includes shipping cost to the consignee SO:
Sales - Gogs = GP -(commission paid to consignee+ advertising to sell the final products) = NI
the seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignor’s behalf
original owners still own the title and risk of loss so they include the inventory
revenue only recognized when all the above conditions are met and the goods are sold to third party
title passes directly to third party buyer at point of sale and not to the consignee at any point in time
ALL this unless there is an agreement otherwise
public warehouses
inventory held by original owners even though posession with warehouse
sales with mandatory buyback
seller should include goods in inventory even though buyer has the title
in this case seller has a requirement to repurchase goods from the buyer
installment sales
if goods sold on installment basis but retains legal title as security for the loan:
if % uncollectible debts cannot be estimated: seller includes
can be estimated: sale recorded with an allowance
Valuation
US GAAP: general rule stated at cost only if we think the goods are going to be sold at a profit;
as long as you think you’re going to be able to cover your carrying valueand go above it you are going to leave it at cost EVEN if you think replacement or reproduction cost is lower
Valuation
US GAAP: general rule stated at cost only if we think the goods are going to be sold at a profit;
as long as you think you’re going to be able to cover your carrying valueand go above it you are going to leave it at cost EVEN if you think replacement or reproduction cost is lower
IFRS
does NOT permit LIFO
Exception to the general cost rule
SP< Cost; we think we’re going to have a loss so we book that loss immediately
utility of goods no longer as great as cost
purpose of reducing inventory to lower of cost or market (profit) or lower of cost and net realizable value (loss)
to show probable loss is sustained (conservatism) in the period in which loss occurs (matching prin)
Pass Key
GAAP
If inventory is NOT lifo or retail:
measured at lower of cost and net realizable value. JUST LIKE IFRS
if inventory is LIFO or retail:
lower of cost or market
IFRS
all inventory measured at lower of cost or net realizable value
Precious Metals and Farm Products
net realizable value
SP-Cost
when stated at a value in excess of cost, should be disclosed on the financial statements
Inventory write downs or loss
US GAAP:
write down reflected in cogs if immaterial; **higher cogs lower profits
if write down amount is material loss is identified separately on i/s
IFRS: no specifications
Reversal of Inventory Write Downs
GAAP: not allowed
IFRS: reversal limited to the amount of original write down; reduction of COGS
Lower of cost of market- old rule
US GAAP only:
LIFO or retail
can be applied to a single item, category, total inventory- method that most clearly reflects periodic income
*when you separately apply LCM to each item-> most conservative EI
market value
middle value of an inventory’s replacement cost, market ceiling, or market floor
replacement cost - 53
cost to purchase the item of invenotry as of valuation date
market ceiling - 70-4 = 66
item’s selling price - costs to complete and dispose or sell called the net realizable value
market floor - 66-7 if profit margin is 10% of sp of 70 = 59
market ceiling - normal profit margin
Lower of cost and net realizable value
IFRS and GAAP (not LIFO or retail inventory)
net realizable value
SP- Cost to complete -> same as market ceiling
Example on 24**
max-> prevents loss in future periods
min-> prevents excess profit realization in future periods
write down under lcm
dr. inventory loss due to decline in market value
cr. inventory
losses or write downs-> LCM
substantial and unusual or infrequent from LCM -> loss disclosed in income from continuing operations
small losses -> cogs
types of inventory systems
periodic vs. perpetual
periodic = purchases = COGS = plug
inventory determined by physical count
usually atleast annually
does not keep running totals; *****ending inventory is physically counted and priced
purchases
bi+purchases = cogas - ei = cogs
PURCHASES: net of returns and discounts
purchases disadvantage
shortages are lumped in with COGS
Perpetual
no purchases; everytime we buy inventory we debit it
dont wait till the end of the period
updated immediately
Journal entries
periodic:
no cogs till end of period:
dr. cash
cr. rev
purchases:
dr. purchases
cr. cash
perpetual: sale: dr. cash cr. sales dr. cogs cr. inventory
purchases:
dr. inventory
cr. cash
THINK OF PERPETUAL AS NORMAL INVENTORY JOURNAL ENTIRES
primary cost flow assumptions
US GAAP: cost flow assumption used bu the company is not required to match physical inventory flows
needs to most clearly reflect income from the period
IFRS:
1) No lifo
2) method should be based on the order in which the products are sold relative to when they were put in the inventory (should match physical flows)
3) specific identification should be used wherever possible
4) same cost flow assumption should be used for all inventories similar in nature
specific identification
no estimating; cost of each item in inventory is unique and identified to that system -> BIG ITEM/HIGH VALUE
car and win’s number; follows the physical flow of that product
estimating
FIFO, LIFO, Weighted average
FIFO
irrelevant periodic or perpetual
first in first out for COGS
ei -> most recent items therefore most closely estimates replacement costs
Rising prices: cogs are going to be lower; NI is going to be higher
FIFO Periodic and Perpectual
every number is same***
weighted average-> generally periodic
total inventory costs including BI/ Total inventory including beg inventory = unit cost
unit cost * number of units sold = COGS
suitable for homogeneous products and a periodic inventory system
Moving average method -> NEED perpetual
computes the weighted average cost after each purchase:
total cost of inventory after each purchase including BI/ total units available after each purchase
then use that to calculate COGS
more current than weighted average
page 28**
LIFO
not permitted under IFRS, allowed under US Gaap
if LIFO is used for tax purposes it must also be used to report financial statements
ending inventory usually does not reflect replacement costs
LIFO financial statement effect
better matches expenses against revenues because matches current costs with current liab
eliminates holding gains
if selling for a period exceeds production there will be a distortion of net income because you’ll start matching revenues to older LIFO layers
LIFO conformity rule
if you use for tax purposes have to use it for financial statements
LIFO Layers
UNLIKE FIFO
LIFO PERIODIC IS NOT EQUAL TO LIFO PERPETUAL
LIFO layer
created each year in which ending inventory > beginning inventory
(more unsold stuff)
additional layer is priced at the earliest cost of the year in which it was created
Problem on F4-30*
periodic: normal
perpetual:
first 3000 sold from the first batch because we dont have choice
now for the rem 1000 sold could come from the first batch or the second batch -> since its LIFO it comes from the second batch
COGAS
ALWAYS SAME perpetual periodic or moving average LIFO FIFO
EI
cogas - cogs
different is in cogs
Table pass key!!
Periodic:
FIFO->Weighted Avg-> LIFO
EI: goes down
COGS: goes up
Perpetual:
FIFO->Moving Avg->LIFO
EI: goes down
COGS: goes up
SAME direction
Moving average
higher EI and lower COGS than weighted average method
Dollar Value LIFO
inventory is measured in dollars and is adjusted for changing price levels
calculate using inventory numbers like normal LIFO and then adjust using price index
price index
internally computed or given to you
= TOTAL ending inventory at year end cost/ ending inventory at base year cost
LIFO added in the current year at dollar value LIFO
LIFO layer at base year cost * price index
dollar value
estimate of change in price levels required relative to base year
NOT IN UNITS AT ALL
At base | Current year cost
example on page 31
price index
different each year; ALWAYS calculated using ending balance
at base year or year 1
base year dollar inventory same as current year inventory
price index
only applies to LAYERS and not to ending balance
Firm purchase commitments
legal agreement to purchase a specific amount of goods at some time in the future
must be disclosed
if you think the contract price > market price and there is going to be some loss-> you recognize the loss AT THE TIME OF THE DECLINE IN PRICE (end of that year) under Other expenses/losses under IDA
JE:
Dr. estimated loss on purchase commitment
cr. estimated liability on purchase commitment
understting overstating
handle each assumption separately then net
inventory
cost of inventory same when you are calculating
FOB shipping point
when IN THE TRUCK
GP%
% of sales
year 2 price index
use year 2 EI levels
year 2 price index
use year 2 EI levels
LIFO perpetual cogs
okay to start liquidating prior layers
consignment
ei of consignee + warehousing costs of consignor before they are transferred to consignee + shipping costs to consignee
only include inventory at cost not mark up
get rid of mark up
payable not recorded till goods sold and if 10% commission 90% of sp is payable
LCM
can be applied to total inventory, groups of inventory or each item separately
LOWEST INVENTORY AMOUNT: when applied to each item separately
lifo reserve
credit balance
DBT: Check!
diff between inventory on lifo method vs any other cost method
find required diff between the two methods
add or sub to LIFO reserve
book additional to cogs should have been more of an increase
dollar value
single inv pool only?!! DBT
moving average IMP
Subtotals
commission
only a portion of sp
obsolete inventory
not a part of cogs
written off from inventory
operating loss not COGS-> unusual gains or losses on i/s
disadvantage of periodic
includes COGS and shortages
shortages cannot be easily distinguished
noncancellable agreement
parts rem for the next two years
so if parts become obsolete in year 1 and three year contract at the end of year 1 there are 2 years remaining
so 2 years * min contract units * (actual purchase price - scrap value because you will get that value back)
advertising on consignment
all of it is expensed even if the entire inventory is not sold!
commission however is based on sales and its amount
ending inventory consignment
cogs + charges needed to get inventory to place of consignment sale
advertising and commission not included in cogs
ending inventory consignment
cogs + charges needed to get inventory to place of consignment sale
advertising and commission not included in cogs
weighted avg normal
ignore actual sp!!
cost of inventory
insurance cost included
prepayment A/P
should be recorded as an asset and not a reduction in a/p
prices increased by 10%
include that as 10% of base prices
CPA 05113
DOUBT
congignee
freight cost, cost of merchandise shipped part of cogs so only on part sold
returns
record once you pass that return date when you cannot reasonably estimate returns
reversal of writedown
allowed under ifrs
limited to previous write downs
affects EI and COGS on I/S
