Two primary objectives of control over inventory are?
1. Safeguarding the inventory
2. Properly reporting it in the financial statements.
purchase order
Authorizes the purchase of the inventory from an approved vendor.
receiving report
Establishes an initial record of the receipt of the inventory.
The amount of inventory is always available in the ?
Subsidiary inventory ledger.
Three inventory cost flow assumptions
FIFO - the first-in, first out
LIFO - last-in, first out
average inventory cost flow method
FIFO METHOD (periodic system)
1. The first units purchased are assumed to be sold and the ending inventory is made up of the most recent purchases.
2. Charged against revenue Cost flow is in the order in which the costs were incurred.
LIFO METHOD (perpetual system)
1. The last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased.
2. Cost flow is in the reverse order in which the costs were incurred
Average inventory cost flow method
1. The cost of the units sold and in ending inventory is an average of the purchase costs.
2. Cost flow is an average of the costs.
Average Unit Cost =
Total Cost of Units Available for Sale / Units Available for Sale
The primary basis for valuing and reporting inventories in the financial statements?
Cost
Valuation at Lower of Cost or Market
1. The cost of replacing items in inventory is below the recorded cost.
2. The inventory cannot be sold at normal prices due to imperfections, style changes, or other causes.
Intercontrol Control Procedures for inventories?
Protect from damage, employee and customer theft.
Physical Inventory
1. Detective Control
2. Detect shortages
3. Detailed listing of merchandise on hand
Effect of inventory errors on financial statement
Misstate the ending inventory, current assests, total assests, and total stockholders' equity (R.E) on the balance sheet.
COGS, GP, NI will be misstated on the income statement
Perpetual Inventory System
# of units and cost of each type of merchandise are recorded in a Subsdiary inventory ledger.
( Go line by line)
Periodic Inventory System
Physical inventory is taken to determine the cost of the inventory and cost of merchandise sold
( Ignore what you sold, only account for what you purchase)
The three inventory costing will normally yield different amounts for?
1. Ending inventory
2. Cost of the Merchandise Sold
3.Gross Profit/ Net Income
FIFO method yields ?
1. The Lowest amount for the Cost of Merchandise Sold
2. The Highest amount for Gross Profit
3. The highest amount for the Ending Inventory
LIFO method yields?
1. The Highest amount for the Cost of Merchandise Sold
2. The Lowest amount for Gross Profit
3. The Lowest amount for the Ending Inventory
Average Cost method yields
Result between FIFO and LIFO
estimate the cost of inventory using RETAIL METHOD
1. Retail prices are accumulated
2. Retail prices avaiable for sale (during the period) - Sales (during the period)
3. Ratio of cost to selling (reatil) price for the merchandise avaiable for sale
estimate the cost of inventory using GROSS PROFIT METHOD
1. Sales - Estimated Gross Profit = Estimated Cost of Merchandise Sold
2. Cost of Merchandise Available for Sale - Estimated Cost of Merchandise Sold = Estimated ending inventory
Average Cost Method
Costs charged against revenue by using the weighted average unit cost of the items sold
FIFO Method
Cost of merchandise sold charged against revenue in th eorder in which th costs were incurred
LILO Method
Most recent merchandise inventory costs charged against revenue
Gross Profit Method / Retail Inventory Method
method of estimating inventory cost based on Relationship of Gross Profit to Sales
Net Realizable Value
Any Direct Costs of Disposal - Estimated Selling Price of an item of inventory, such as Sales Commissions
# of Days' Sales in Inventory
Inventory end of year / Avg daily cost of goods sold
Relationship between volume of goods sales and inventory
Inventoty Turnover
Cost of Goods sold / Avg inventory
Relationship between volume of sales and inventory
Lower-of-Cost-or-Market (LCM) methos
A method of valuing inventory that reports the inventory at the lower of its cost or current market value (replacement cost)
General Motors
Buy, Work, finish on the material (called that inventory) to put together to make a profit,
Car Dealership, Publix
What you see there, buy from GM, (called that inventory) to sell it for a profit
Internal Control pg 268-269
?
Begin + Purchased - COGS =
#NAME?
COGS + E.I =
0
MAS = COGS + E.I net time going to be?
MAS = COGS + E.I
Okay= <Under><Over> = N.I, G.P, M.I
Okay= <Over> <Under> = N.I, G.P, M.I
Exhibit 8,9,10
???
Who owns it who has the title? Pg230 FOB
1. FOB Shipping point - Inventory til item reach carrier/port.etc
2. FOB Destination - Inventory until buyer receives item
Current Assest
More inventory you sell, the more Gross Profit
Retail Inventory method
Estimating inventory cost is based on the relationship of the MAS to reatil price of the same M
Gross Profit method
Estimated gross profit for the period to estimate the inventory at the end of the period