Ch. 9 Inventory Add Issues Flashcards
information is complete, neutral, and free from error, accurately reflecting the economic events or transactions it is intended to depict
faithful representation
provide all necessary information
completeness
good process to determine the accounting numbers/accounts
free from error
not too positive, not too negative, just tell it as it is
neutrality
-dealing with: seperately for each inventory item or each inventory classification
-compare current cost $71,000 to the lower cost or NRV $67,000
- reduce amount of inventory by $3500
-Whats the two possible journal entries?
- Dr. COGS (-SE) 3500
Cr. allowance to reduce inventory to NRV (-A contra asset) 3500
2.
Dr. holding loss on inventory (-SE) 3500 (we have not sold the inventory)
Cr. inventory (-A) 3500
- can mix and match those debits and credits
ceiling =
net realizable value
floor =
NRV - normal profit margin
net realizable value equation
net realizable value =
estimated selling price - cost to complete and sell
If replacement cost is between celing and floor what number gets put up for market
replacement cost
If replacement cost is above the ceiling what number gets put up for market
ceiling number
If replacement cost is lower than the floor what number gets put up for market
floor number
we measure inventory based on
what we paid to acquire it
if the inventory we acquired has dropped in value what do we do
we recognize the expense (or loss) immediately
what do we do if inventory has increased in value
do nothing
Gross profit equation
Gross profit =
revenue - COGS
Gross margin equation
Gross margin =
Gross profit / total seling value
- not GAAP
- imprecise
- relies on past results
- easy way to estimate the value of ending inventory
gross profit method
Gross profit as a percentage of sales equation
gross profit as a percentage of sales =
gross profit as a percentage of cost / (1 + gross profit as a percentage of cost)
3 steps of the gross profit method
- determine gross profit as a percentage of sales
- estimate costs of goods sold
- estimate ending inventory
estimated COGS equation
estimated COGS =
sales * (1 - gross profit as a percentage of sales)
how to find estimate ending inventory
beginning inventory XX
+ net purchases XX
= COGAFS XX
- ending inventory ?
= COGS XX
agreement to purchase quantity of materials during a future period at an agreed upon cost
purchase commitments
why would a buy enter into a purchase commitment
lock it in at a certain price
-chipotle-inputc: rice, beans, beef, lettuce, sells to customers:fixed in the short run
why would a seller enter into a purchase commitment
agree to a purchase agreement
- lock in their demand/know how much to produce
financial statements you write “we entered into a purchase agreement to buy all beef for $3/lb for the next 6 months
disclose if noncancelable and material
record a loss if contract price is < or > market (LIFO)
contract > market (LIFO)
record a loss if contract price < or > NRV (other methods)
contract > NRV (other methods)
if you discover an inventory error in the same period as it occurred what do you do
fix it
if you discover an inventory error in the future what do you do
need to correct the error in the current period
go back and re-do previous year accounting
retrospective restatement
in 2024, a firm overstates their ending inventory by $12,000. in 2025 they discover the error.
- 2024 cost of goods sold
- 2024 net income
- 2024 retianed earnings
- 2024 cost of goods sold: understated
- 2024 net income: overstated
- 2024 retained earnings: overstated
in 2024, a firm understates their beginning inventory by $12,000. in 2025 they discover the error.
- 2024 cost of goods sold
- 2024 net income
- 2024 retianed earnings
- 2024 cost of goods sold: understated
- 2024 net income: overstated
- 2024 retianed earnings: overstated
in 2024, a firm understates their ending inventory by $12,000. in 2025 they discover the error.
- 2024 cost of goods sold
- 2024 net income
- 2024 retianed earnings
- 2024 cost of goods sold: overstated
- 2024 net income: understated
- 2024 retianed earnings: understated
