Unit 7 - Inventories Flashcards
Inventory Fundamentals:
FOB Destination
FOB destination means that title passes upon delivery at the destination, the seller bears the risk of loss during transit, and the seller is responsible for the expense of delivering the goods to the designated point.
Inventory Fundamentals:
FOB Shipping Point
Merchandise shipped FOB shipping point means title and risk of loss passes when goods are shipped.
Inventory - Consignment Accounting
Are consigned goods included in inventory?
How is revenue accounting for?
Consigned goods are in the possession of the consignee but remain the property of the consignor and are included in the consignor’s inventory count at cost, not selling price.
Sales revenue from these consigned goods should be recognized by the consignor when the merchandise is sold (delivered to the ultimate customer).
Inventory - Consignment Accounting
What inventoriable costs should be part of inventory?
Inventoriable costs include all costs of making the inventory ready for sale. Costs incurred by a consignor on the transfer of goods to a consignee are costs necessary to make the inventory ready for sale. Consequently, they are inventoriable. Thus, the in-transit insurance premium is inventoried. Advance commissions are either receivable/prepaid expense, not an element of inventory cost.
Inventory - Cost flow methods
Average pricing method (periodic inventory system)
Take cost of beginning inventory and purchases AND total of Beg Units plus purchases to get an average price = total cost / total units
Inventory - Cost flow methods
Moving average method (perpetual inventory system)
It requires that a new weighted average be computed after every purchase. This moving average is based on remaining inventory held and the new inventory purchased. (see 7.3 example, focus # 2)
Inventory - Cost flow method
LIFO (perpetual inventory system)
In a perpetual inventory system, purchases are directly recorded in the inventory account, and cost of goods sold (COGS) is determined as the goods are sold. Under LIFO, the latest goods purchased are assumed to be the first to be sold. (see 7.3 example, focus # 3)
Inventory - Cost Flow Methods Comparison
FIFO and LIFO
In a period of rising prices, FIFO inventory is higher than LIFO inventory. FIFO assumes that the latest and therefore the highest priced goods purchased are in inventory. But LIFO assumes that these goods were the first to be sold. Accordingly, the inventory at December 31, Year 1 (beginning inventory for Year 2), is higher for FIFO than LIFO.
Dollar-Value LIFO
To compute the ending inventory under dollar-value LIFO, the ending inventory stated in year-end or current-year cost must be restated at base-year cost. The layers at base-year cost are computed using a LIFO flow assumption and then weighted (multiplied) by the relevant indexes to price the ending inventory. A price index for the current year may be calculated by dividing the ending inventory at current-year cost by the ending inventory at base-year cost. This index is then applied to the current-year inventory layer stated at base-year cost.(see 7.5 , focus # 1)
Ending inventory at CY cost / Ending inventory at base-year cost
Measurement of Inventory Subsequent to Initial Recognition
How is inventory measured under the FIFO Method
Inventory accounted for using the FIFO method (or any cost method other than LIFO or retail) is measured at the lower of cost or net realizable value (NRV).
NRV is the estimated selling price in the ordinary course of business, minus reasonably predictable costs of completion, disposal, and transportation.
