Inventory Flashcards
what is included in ending inventory?
any merch owned by entity
costs: freight, insurance in transit, taxes, packaging
Goods on consignment
goods are still owned by seller, in consignor’s inv not consignee
Items in the process of production
finished goods, work in process and raw materials
Items consumed in production
materials, labor and overhead
What’s included in cost of inventory
purch returns, freight-in, sales tax on inv purch, packaging costs, insurance on transit
Manufacturing input Costs
Direct material, direct labor, fixed overhead, variable overhead
Cost flow assumption
the assignment of value to inventory as it flows from the BS to the IS, goods does NOT have to = physical flow of goods
Inventory Qualities
periodically and perpetual system
Periodic System
periodic physical count
Cost flow assumptions
specific identification, weighted avg, FIFO, LIFO –> flow of cost to COGS
Specific Identification
used mostly for large distinguishable products
Weighted Avg
- weighted avg cost per unit = COGS avail for sale / # of units avail for sale
- weighted avg cost per unit X #of units in ending inv = ending inv
FIFO
First in first out, lowest COGS, highest NI, highest ending inv
LIFO
Last in First out, highest COGS, lowest NI, lowest ending inv
Formula for Calc COGS (for both perpetual and periodic method)
Beg Inv \+Net Purch = Goods avail for sale - ending inv = COGS
Formula for Net Purchases
Gross purchases \+ transportation (freight in) - purch returns and allowances - purch discounts = Net Purch
Perpetual System
records every purch and sale as it occurs, purch are recorded directly to inv
Moving Avg (Cost Flow Assumption)
Implies perpetual system, new weighted avg is calc after each purch
Dollar Value LIFO
estimates price level changes for specific inventories, allows application of LIFO using pools of inventory rather than keeping track of purch and sales
Conversion Index (Dollar Value LIFO)
= ending inv in current yr dollars / ending inv in base yr dollars
Advantages of DV LIFO over LIFO
- reduces the effect of liquidation problem (turns ending inv from FIFO to LIFO reducing impact)
- Allows comps to use FIFO
- Reduces clerical costs
Gross Margin (Gross Profit) Inventory Method
estimates COGS based on historical gross profit rates, only used if it isn’t possible to determine ending inv because of fire or other loss. US GAAP does not allow for annual reporting but okay for interim
Relative Sales Method
method used to allocate initial cost in a basket purch
Gross Margin (Margin on Sales) formula
(sales - COGS) / sales
Margin on Cost
(sales - COGS) / COGS
Market Value Cost
replacement cost subject to a range of a ceiling and a floor
Ceiling Value
= Net Realizable Value
Net Realizable Value
estimated selling price of inv less the predicted cost of completion or disposal including transportation
Floor Value
= NRV - normal profit margin
FIFO and Weighted Avg use what subsequent measurement?
Lower of (original) cost or Net Realizable Value, if cost is less than NRV no write down
LIFO and Retail use what subsequent measurement?
Lower of (original) cost or Market Value
Inventory Equation
Beg Inv \+ Purchases = Goods avail - Ending inv = COGS NI Retained Earnings
Differences between US GAAP and IFRS
IFRS allows only LC-NRV, required to apply the same cost flow to similar inv, reversal up to orig cost on write down, LIFO prohibited
