Chapter 26: Inventory Flashcards
(16 cards)
What are the three types of inventories?
- Held for sale in the ordinary course of business (finished goods)
- In the process of production for sale (work-in-progress)
- Materials or supplies to be used in production or in rendering services (raw materials or consumables)
These categories help classify inventory based on their status in the production or sales process.
How is the initial measurement of merchandise inventory determined?
Costs incurred to bring the inventory to its present location and condition are added to inventory.
This includes all costs necessary to prepare the inventory for sale, excluding storage and shipping costs to the customer.
What costs are excluded from the cost of inventory?
- Storage costs
- Shipping costs to the customer
These costs are not included in the inventory valuation once it is ready for sale.
What are the two methods to record purchase discounts?
- Gross method
- Net method
The net method is theoretically preferred as it reflects the cash amount for which inventory can be acquired.
What are the main categories of costs added to manufacturing inventory?
- Raw materials
- Direct labour
- Production overhead
These costs are essential for determining the total cost of inventory in a manufacturing environment.
What are conversion costs?
The amount of direct labour and production overhead costs required to turn raw materials into a product
Conversion costs are crucial for understanding the total cost involved in manufacturing.
How are variable production overhead costs allocated?
Based on the actual use of the production facility
This ensures that costs are accurately represented according to production levels.
What is net realizable value (NRV)?
The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale
NRV is used to assess whether inventory is overvalued.
What happens when inventory is written down to its NRV?
An inventory impairment is recorded, generally debited to COGS
This method directly reflects the impact of the writedown on the cost of goods sold.
What is the allowance method for inventory writedowns?
A separate contra asset account is used to record the amount of the writedown
This method does not adjust COGS and shows the loss on the income statement.
How is the reversal of inventory writedowns recorded?
As a reduction in expenses, generally as a reduction in COGS
This reflects the increase in inventory value when NRV increases.
What is COGS?
Cost of Goods Sold
This expense represents the carrying amount of inventories sold in the same period as the revenue is recognized.
What are the three acceptable methods for allocating costs between ending inventory and COGS?
- Specific identification
- First in, first out (FIFO)
- Weighted average
Each method has its own application based on the nature of the inventory.
Describe the specific identification method.
Qualifying costs are assigned to individual items of inventory
This method is typically used for unique items that are not interchangeable.
What does FIFO stand for and how does it work?
First in, first out; the oldest inventory items are moved to COGS first
This method assumes that the oldest inventory is sold before the newer inventory.
How is the weighted average cost calculated?
(beginning inventory cost + cost of purchases to date) / (quantity of inventory in beginning inventory + quantity of purchases to date)
This formula provides a consistent average cost for inventory valuation.
