Inventory Flashcards
What is included in inventory?
- Property for Sale
- FG + WIP + Raw Materials
- Property consumed in manufacture (materials, labor, overhead)
What is included in ending inventory?
- Any merchandise owned
- Capitalize cost to bring to sale (freight, insurance, taxes, packaging)
- DO Not include Goods on Consignment - not owned
Shipping terms
Free on board - FOB - party w/o risk
Inventory in transit is included in which ever entity has the risk of loss
FOB Destination
Destination is Free - risk to Seller, seller includes in inventory
FOB Shipping Point
Shipping point is Free - risk to buyer, buyer includes in inventory
Is purchase returns included in inventory?
Yes - contra account to purchases
Is freight in included in inventory?
Yes
Is freight out included in inventory?
No, this is a selling expense
Is interest on purchase included in inventory?
No, this is a financing expense
Is sales tax on acquisition included in inventory?
Yes
Is packaging cost included in inventory?
Yes
Is insurance on transit included in inventory?
Yes
Is transportation to consignees included in inventory?
Yes, cost to bring product to market
Is sales commission included in inventory?
No, this is a selling cost
Is advertising included in inventory?
No, this is a selling cost
Is trade discounts be included in inventory?
Yes
Net Purchases
=gross + trans in - returns & allow - discounts
COGS
=Beg Inv + Purchases (AKA CGAfS) - End Inv
Cost Flow - Specific Identification
used for large products (cars)
Cost Flow - Weighted Avg
CGAfS/# of units
Cost Flow - FIFO
First goods bought are first sold. Oldest cost assigned to COGS, most recent costs assigned to inventory. Lowest COGS, Highest NI, Highest End Inv with rising prices.
Cost Flow - LIFO
Last purchased are first sold. Newest cost assigned to COGS, oldest costs assigned to inventory. Higher COGS, Lower NI and Lower End Inv with rising prices.
Advantage - Gross margin reflects latest purchase costs and is a better representation of future gross margin.
Disadvantage - Ending inventory cost will be less reliable than under FIFO.
Cost Flow - GAAP
Does not require that cost flow assumption match the actual flow of goods.
Inventory Write Offs
Not part of COGS, reduces inventory
Perpetual Systems
FIFO & Specific the same for perpetual & periodic.
LIFO & Average different. Weighted average becomes moving average. LIFO cost assigned after each sale and will be lower in times of rising prices in perpetual vs periodic.
Timing of the sale is very important for End Inv calculations.
Perpetual vs Periodic Journal Entries
Perpetual uses inventory and records COGS at time of sale. Periodic uses purchases.
FIFO vs LIFO
Type End Inv COGS
FIFO = latest earliest
LIFO = earliest latest
FIFO matches better on balance sheet. LIFO matches better on Income Statement.
LIFO Liquidation
oldest layer of cost reduced - will boost NI
happens due to poor planning and lack of supply
LIFO advantage
lower taxes from lower NI
Dollar Value LIFO
Allows FIFO for internal and LIFO for external. Pools of inventory, reduces clerical costs and reduces LIFO liquidation problem.
Inventory Pool
= End Inv Current YR Dollars/ End Inv Base Yr Dollars
Price Index exp 1.10
To convert to base year (1/1.1) * dollar amount to convert to current year (1.1/1) * dollar amount.
LIFO layer for year
End Inv in base year dollars - beg inv in base year dollars
Figure in base year dollars first to factor out prices changes.
Dollar Value LIFO Steps
1) Convert EOY inv to base year
2) Determine increase in base year prices
3) Convert increase to current year prices
Conversion Index Cal
End Inv current year dollars/ end inv base year dollars
Dollar Value LIFO Calc
= Beg DV LIFO + increase at base yr dollars*index
Dollar Value Beg Inv LIFO in year of adoption
= same beg inv in base year dollars
Lower of Cost or Market
market with ceiling and floor
ceiling = selling price - cost to complete
floor = selling price - normal profit
Gross Margin
Not allowed for observable inventory
Margin on Cost Formula
=(sales-COGS)/COGS
Gross Margin % or Margin on Sales
=(sales-COGS)/sales
Gross Margin Method
=Beg. inventory + net purchases = end. inventory + cost of goods sold
=Beg. inventory + net purchases = end. inventory + sales (cost/sales)
T or F Margin on Cost > Margin on Sales
True
Retail Inv Method
1) End Inv @ Retail
2) Cost to Retail Ratio
3) 1 * 2 = End Inv @ Cost
Average LCM or Conventional Method - cost ratio
The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator, but excludes net markdowns from the cost ratio calculation.
FIFO - cost ratio
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Thus, C/R measures the cost-to-retail ratio only for the current-period purchases on the assumption that all beginning inventory will be sold (first-in, first-out). If ending inventory consists entirely of current-period purchases, the C/R should not include beginning inventory
FIFO, LCM - cost ratio
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Then, in an effort to arrive at a more conservative cost ratio, the calculation also excludes net markdowns from the cost ratio. This causes the denominator of C/R to be larger, because net markdowns are not subtracted, and thus the ratio itself is smaller. When C/R is multiplied by EI(retail), the resulting EI(cost) is smaller, approximating the effect of LCM.
Average - cost ratio
The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of C/R.
Inventory Errors
Beg Inv \+Purchases = CGAFS -End Inv =COGS
COGS mistake has inverse effect on NI and RE