purchase order
authorizes the purchase of the inventory from an approved vendor
receiving report
establishes initial record of the receipt of the inventory- it is compared with the purchase order to make sure that the inventory received is what was ordered. Both then are compared to vendor's invoice. If all 3 agree- it's recorded in the accounting re
inventory subsidiary ledger
amount of inventory
examples of security measures to safeguard inventory
1)Storing inventory in areas restricted to only authorized employees
2) Locking high-priced inventory in cabinets
3) Using two-way mirrors, cameras, security tags, and guards
physical inventory
count of inventory to make sure amount recorded in the accounts is correct
FIFO
First-In First-Out cost-flow assumption
cost flow is in order in which the costs were incurred
ending inventory is made up of recent purchases
LIFO
Last-In, First-Out cost flow assumption where cost flow is in the reverse order in which the costs were incurred
ending inventory is made up of first purchases
Average Cost
Cost Flow is an average of the costs- average of purchase costs
Lower-of-cost-or-market(LCM) method
method of valuing inventory that reports the inventory at the lower of its cost or current market value(replacement cost)
net realizable value
estimated selling price-direct costs of disposal
when merchandise can only be sold below it's original cost
causes of inventory errors on the balance sheet
1)physical inventory on hand was miscounted
2)Costs were incorrectly assigned to inventory. For example, the FIFO, LIFO, and Average Cost method was incorrectly applied
3) Inventory in transit was incorrectly included or excluded from inventory
4)Consigne
If beginning inventory is UNDERSTATED...
then income statement effect:
COMS is understated
and Gross Profit is Overstated
and Net Income is Overstated
If beginning inventory is OVERSTATED...
then income statement effect:
COMS is Overstated
and Gross Profit is understated
and Net Income is Understated
If ending Inventory is UNDERSTATED...
then income statement effect:
COMS is Overstated
and Gross Profit is understated
and Net Income is Understated
If ending Inventory is OVERSTATED...
then:
COMS is Understated
Gross Profit is Overstated
and Net Income is Overstated
If ending inventory is UNDERSTATED(balance sheet effects)....
then:
Merchandise Inventory is Understated
Current Assets are Understated
Total Assets are Understated
Stockholder's Equity/Retained Earnings are Understated
If ending inventory is OVERSTATED(balance sheet effects)...
then:
Merchandise Inventory is Overstated
Current Assets are Overstated
Total Assets are Overstated
Stockholder's Equity/Retained Earnings are Overstated