Chapter 5- Reporting and Analyzing Inventory Flashcards
What are goods on consignment?
-goods shipped by the owner (consigner) to another party (consignee)
-Consignee sells goods for the consigner
-Consignor owns the goods and reports them in their inventory
What are goods damaged or obsolete?
-Damaged, obsolete (out-of-date), and deteriorated goods are not reported in inventory if they cannot sold
-If goods can be sold at a lower price, they are included in inventory at net realizable value
What is the equation for net realizable value?
Net realizable value= Sales Price- Cost of Making the Sale
What are the 4 methods to assign costs to inventory?
- FIFO (first in, first out) *Most common
- LIFO (last in, first out)
- Weighted Average
- Specific Identification
What is FIFO?
“First in First out”
-Sold in order acquired
-Cost of earliest units are charged to COGS
-Most recent are still in ending inventory
-Examples- food, items with expiration dates (car seats)
What is LIFO?
“Last in, First out”
-Most recent purchases are sold first
-Most recent costs are charged to COGS
-Earliest units are still in ending inventory
-Worst method for valuing replacement cost since newest is sold and oldest item remain in inventory
-Items still in inventory could be obsolete or prices would not be similar
-Examples- socks, white t-shirts, notebooks, paintbrushes (doesn’t matter what sells first)
What is Weighted Average?
-AKA Average Cost
-Uses average cost per unit of inventory at the end of the period
-Used for items in which you cannot specifically identify
-Example- liquid inventory/ gasoline
What is the Weighted Average Cost per Unit equation?
Weighted Average Cost per Unit= Cost of goods available for sale/Units available
What is Specific Identification?
-Each item in inventory must be able to be matched with a specific purchase and invoice to use this method
-We also need sales records that identify exactly which items were sold
-Good for high end, unique/specialized items
-Examples- cars, diamonds, designer purses
For every problem goods available for sale (GAFS) will split into 2 components…
- Cost of goods sold
- Ending inventory
How often should weighted average be recomputed?
After every purchase
-do NOT recompute after a sale
-new computed WA becomes the new inventory cost until another purchase is made
What is Lower of Cost or Market (LCM)?
-Inventory is valued at LCM on books
-Cost= initial purchase price and any amount paid to get the inventory ready for sale (ex: transportation, repairs, install, etc)
-Market (FMV-fair market value)
-how much the good currently sells for on the open
market
-“Replacement cost”
-“Cost” is the amount currently reported on the books
-If “LCM” < cost —> on AJE must be booked
-If LCM > NO AJE
What is inventory turnover?
-Shows how many times a company “turns over” its inventory in a period if no new inventory is purchased
-Shows if management is doing a good job at managing its inventory
What is the equation for inventory turnover?
Inventory Turnover= Cost of Goods Sold/Average Inventory
(Average Inventory=Beginning Inventory + Ending Inventory/2)
What is Days Sales in Inventory?
-# of days a company can sell its inventory if no new purchases were made
What is the equation for Days Sales in Inventory?
=[Ending inventory/COGS] x 365
