Inventory and Cost of Goods Sold Flashcards
What are the two types of companies that have inventory?
Merchandisers and Manufacturers
What is Cost of Goods Sold (COGS)
The term used for the value of the inventory that has been sold to customers.
COGS is subtracted from Revenues to derive Gross Profit
What are the costs included in inventory as an asset?
Purchase cost, freight charges, import duties, taxes, transportation costs, handling costs, and other costs necessary to get the inventory ready for sale.
How are the purchases during the year related to inventory costs?
The purchases made during the year add to the initial inventory, contributing to the total cost of inventory available for sale.
How is the Total Inventory Available for Sale calculated?
Beginning inventory balance plus purchases during the year.
What are the four methods of inventory costing?
Specific Identification, Weighted-average cost, First-in, first-out (FIFO), Last-in, first-out (LIFO).
How does Specific Identification method allocate inventory costs?
It matches each unit of inventory with its actual cost.
How does Weighted-average cost method allocate inventory costs?
It assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items.
How does FIFO method allocate inventory costs?
It assumes the first units purchased (oldest) are the first ones sold.
How does LIFO method allocate inventory costs?
It assumes the last units purchased (newest) are the first ones sold.
How can the three primary methods of inventory costing be compared?
They differ in how they value inventory and cost of goods sold, especially during periods of changing prices which can lead to different financial statement effects.
What are the two ways inventory costing and tracking take place depending on the systems at a company?
Perpetual inventory system and Periodic inventory system.
How is the determination made whether shipping costs need to be included in inventory?
It depends on the shipping terms, typically FOB shipping point or FOB destination.
“FOB” stands for “Free On Board.” It’s a term used in international trade that determines when the ownership and liability of goods are transferred from the seller to the buyer. Here’s a breakdown of the two terms you mentioned:
FOB Shipping Point (or FOB Origin):
Ownership of the goods is transferred to the buyer as soon as the goods are in the hands of the carrier.
The buyer is responsible for freight charges and assumes the risk for the shipment from the shipping point onward.
In accounting, the buyer would record the inventory as soon as it’s shipped, not when it’s received.
FOB Destination:
Ownership of the goods remains with the seller until the goods reach the buyer’s location.
The seller is responsible for freight charges and assumes all risk until the goods are delivered.
In accounting, the buyer would record the inventory only when the goods are received.
In summary, the key distinction between the two is when the ownership and risk transfer from the seller to the buyer. With FOB Shipping Point, the transfer happens as soon as the goods are shipped, while with FOB Destination, the transfer only occurs when the goods are delivered to the buyer’s location.
How do purchase discounts affect inventory when buying on credit?
Purchase discounts, if taken, reduce the cost of inventory acquired.
