Inventory Flashcards
Items included in Ending Inventory
- -If owned by business on last day of accounting yr, regardless of location, merchandise included in inventory–goods awaiting to be shipped, but buyer has paid for them are not included
- Goods on Consignment- owned by consignor
- -Goods in Transit- FOB Destination=title passes at destination–FOB Shipping Pt= title passes at Shipping Pt
- -Overhead & Direct Labor
Costs included in Inventory
Purchases, purchase returns, purchase discounts, freight-in, sales/taxes on acquisition, packaging costs, insurance on transit from supplier
Periodic Inventory
- -Merchandise Inventory is beginning Inventory throughout the yr (less expensive)
- -Purchases will be recorded in purchases and related accts instead of inventory acct
Objectives of Adjusting entry under Periodic Inv
- Ending balance of inv is formally entered in
- Beginning balance of inv is closed
- Purchases and related accts are closed
- COGS for yr is entered in
Beg Inv + Net Purchases = End Inv + COGS
DR Merchandise Inv (Ending)
DR Pur Returns & Allowances
DR Purchase Discounts
DR COGS
CR Merchandise Inv (Beginning)
CR Purchases
CR Transportation In
Types of Cost-Flow Assumptions in Periodic Inv
- Specific Identification- specifically identify cost of each item (car in car dealership)
- Weighted Average- COGS/# units available for sale
- FIFO- First-in First-out
- LIFO- Last-in First-out
FIFO
- -Way most move inv, produces highest income and highest inv in periods of rising prices,
- FIFO favors balance sheet–Periods of rising prices Inventory Value more relevant, but COGS, Gross Margin, Income is not
LIFO
- -Less reliable in End Inv than FIFO, Lowest net income and inventory in periods rising prices, get a tax benefit, doesn’t mean way firms actually move their inv
- LIFO favors Income Statement–COGS, GM, & Income more relevant, but inventory value less
- -Minimizes Inventory profits (aka phantom/illusory profits)
- -Stay away from LIFO liquidation bc it takes away tax benefit and matching current rev/exp is distorted (when need to go to previous period to supply goods sold in this period.
Perpetual Inventory
Uses inv acct unlike periodic, record COGS at time of sale
Types of Cost Flow Assumptions in Perpetual Inv
- Specific Identification-same as Periodic
- Moving Average- new weighted avg cost after each new purchase
- FIFO - sames as Perodic
- LIFO- cost determined with most recent cost preceding the sale of item
Advantages of Dollar Value LIFO
- Reduces Effect of Liquidation Problem
- Allows Companies to use FIFO internally
- Reduces clerical costs
Conversion Index for Dollar Value LIFO
End Inv in Current Yr $ / End Inv in Base-Yr $
Index is multiplied by increase in Inv for the period as measured in base-yr $s
Lower of Cost or Market Approaches
- Individual Item Basis: each individual item is compared (most conservative-lowest-inventory & largest holding loss)
- Category Basis: items grouped into categories and categories are compared
- Total Basis: Single comparison of all inventory
What valuations are Market, Ceiling Value, & Floor Value
- Market: Replacement cost if not greater than ceiling or less than floor
- Ceiling Value: Net realizable value (selling price-estimated cost of completion & selling)
- Floor Value: Net realizable value minus normal profit margin
Lower of Cost or Market Direct Method & Allowance Method
Direct: holding loss (higher cost-lower market value) related to inv is included in COGS.
Allowance: holding loss related to inv is separately identified in contra inv acct w/ separate disclosures of holding loss.
Gross Margin Method
- -May not be used for financial reporting of Inv, used ONLY for estimation purposes
- -Estimates COGS from sales using % based on historical data, ending inv can then be inferred from Beg Inv, purchases, and COGS
