Lecture 7 Flashcards
What are inventories
Definition:
Tangible property that a company is holding either
(1) to sell it in the normal course of business, or
(2) to use it to produce goods/services for sale.
Assets held for sale in the normal course of business; and
– Assets used to produce goods that will be available for sale.
What are included in the inventory account
All costs necessary to bring a good to a usable or salable conditon, and to deliver it to the promised location
- Invoice price (cosst of purchasing raw materials)
- Freight costs
- Inseption costs
- Preparetion costs
Inveotry account of inveotry
Ex
Coleman Company has provided the following information: Beginning Inventory, $117,000; Cost of Goods Sold, $467,000; and Ending Inventory, $88,500.
How much were Coleman’s inventory purchases?
On the debit account of inveotry (A)
we have beginnin ginveotry and we add inventory purchases for the period
and on the right side we have cost of good sold (I/S expenses)
So beginning inveotry + purchases - COGS = Ending inventory
answer = 438,500
Inventory costing methods
and what is average cost per unit formula/
FIFO (Firs tin first out)_
LIFO (Last in , first out) - only allowed by US.GAAP
Weighted average
Specification identification
FIFO (first in, First out)
* The cost of the earliert unit parchased is what flows to COGS
LIFO (Last in , First out) – Only allowed by U.S. GAAP
* The cost of the latest units purchased is what flows to COGS
Weighted Average
* The aerage cost per unit currently in inventory is what flows to cogs
Average cost = Cost of goods available for sale / # of units available for sale
Special Identification:
* Each unit is indivually tracked, and its actual costs flows to COGS
Example Purchases of Inventory
Purchases of Inventory
A new company purchases one unit of inventory on January 1, 2020 for $500
Inventory (+A) $500
Cash (-A) $500
It then purchases a second unit of inventory on January 8, 2020 for $600
Inventory (+A)
$600 Cash (-A)
$600
On January 12, 2020 it sells one unit of inventory for $900
Cash 900
Sales revenue 900
What are the COGS and Inventroy using FIFO, LIFO, Weighted average
FIFI=500
LIFO=6000
WA=550
Ending invenotry for FIFIo = 600
EI lifo = 500
EI for wa = 550
Ending Balance in Inventory = $500 $600 $500
* Weighted Average
COGS = $550 ($1,100 / 2 units avl *1 unit sold)
Slide 16 of 27
$550
Ending Balance in Inventory = $550
Inventory costing method: Financil stamtne effects
FIFO:
Ending inventory (B/S) approximates current replacement costs
Under FIFO, the cost of the ending inventory is based on the prices paid for the most recent purchases. This is because FIFO assumes that the items first added to the inventory (which might have been bought at lower prices) are the ones sold first. Consequently, the items remaining in inventory are those that were acquired more recently, potentially at higher prices, especially in a period of rising costs.
Under FIFO, the cost of the ending inventory is based on the prices paid for the most recent purchases. This is because FIFO assumes that the items first added to the inventory (which might have been bought at lower prices) are the ones sold first. Consequently, the items remaining in inventory are those that were acquired more recently, potentially at higher prices, especially in a period of rising costs.
Under FIFO, the cost of the ending inventory is based on the prices paid for the most recent purchases. This is because FIFO assumes that the items first added to the inventory (which might have been bought at lower prices) are the ones sold first. Consequently, the items remaining in inventory are those that were acquired more recently, potentially at higher prices, especially in a period of rising costs
Better matches current costs in COGS (I/S) with revenues
Under LIFO:
Better matches current costs in COGS (I/S) with revenues
Weighted average
Smooths out price changes
Perpetual and Periodic Inventory Systems
Perptual :
Update inventory records constantly, or perpetually, with each purchase and sale.
* Inventory journal entries made at each purchase and sale.
At end of period:
– Physically count inventory on hand, but no need to make an entry since Inventory and COGS are up to date.
Periodic:
Update inventory records periodically (e.g. end of each day or month). Think of a vendor at a farmer’s market who uses a cash register.
At end of period:
– Physically count inventory on hand, and use it to calculate COGS and make an entry.
Beg. Inventory
+ Purchases
- End. Inventory (counted)
Cost of Goods Sold
how to record Average cost and FIFO by perptual and periodic
ex 200 first month, 200 next month
Periodic:
Average cost:
COGS: (Total cost / total units) *units sold
FIFO:
COGS: first units solid * cost, second unit sold * cost etc
until the last ones
Perpetual:
Average cost:
Look at the ened of the period wher they sold, ex 200. Youa dd total cost for both of those months then divide by total units purchased then multiply thwt by the units solid
Cogs: (total cost of units in period / total units) * sold
What if selling price (i.e., net realizable value) falls
below that original cost
and how do we do it?
– We write down the value of ending inventory using the Lower
of Cost or Net Realizable Value method
To write down the inventory value, we increase COGS*:
Cost of Goods Sold (+E; -SE) $X
Inventory (-A) $X
What effect does net realize value or lower of cost affect finaincial statment?
how does Lower of Cost or Net Realizable Value decrease net icnome this eyar but increase it next year
Decrease in Net Income in the Current Year: When the LCNRV rule is applied, it often leads to writing down the value of inventory. This happens when the market value (net realizable value) of the inventory falls below its original cost.
Example:
December 10: Purchased inventory with Net Realizable Value (NRV) of $10,000 for
$9,000.
December 31: Inventory purchased on December 10th has a NRV of $8,000
January 11: Inventory purchased on December 10th has a NRV of $9,000
So you record it at 9,000 be ause thats what the company paid for it
Inventory (+A) 9000
Cash (-a) 9000
Decmber 31
COGS(+E) 1000
Inventory (-a) 1000
January 11:
COGS(-E) 1000
Inventory (+A) 1000
January 31: Inventory purchased on December 10th has a NRV of $10,000
No Entry
Only recoveries of value allowed; cannot write up value above original
