Indicate whether each item should be included or excluded from the inventory taking:
900 units of inventory shipped on consignment by Cashin to another company.
Included
Indicate whether each item should be included or excluded from the inventory taking:
3,000 units of inventory in transit from a supplier shipped FOB destination.
Excluded
Indicate whether each item should be included or excluded from the inventory taking:
1,200 units of inventory sold but being held for customer pickup.
Excluded
Indicate whether each item should be included or excluded from the inventory taking:
500 units of inventory held on consignment from another company.
Excluded
FIFO
First in FIrst Out
LIFO
Last in First Out
The lower-of-cost-or-market value
Adding the lowest cost of date of each category
Identify which of the preceding items should be included in inventory:
Goods held on consignment for MailBoxes Corp. since December 12.
Do not Include in Inventory
Identify which of the preceding items should be included in inventory:
Goods shipped on consignment to Reddy Holdings Inc. on January 5.
Include in Inventory
Identify which of the preceding items should be included in inventory:
Goods shipped to a customer, FOB destination, on January 29 that are still in transit.
Include in Inventory
Identify which of the preceding items should be included in inventory:
Goods shipped to a customer, FOB shipping point, on January 29 that are still in transit.
Do not Include in Inventory
Identify which of the preceding items should be included in inventory:
Goods purchased FOB destination from a supplier on January 25, that are still in transit.
Do Not include in Inventory
Identify which of the preceding items should be included in inventory:
Goods purchased FOB shipping point from a supplier on January 25, that are still in transit.
Include in Inventory
Identify which of the preceding items should be included in inventory:
Office supplies on hand at January 31.
Do not Include in Inventory
Worthmore Bank and Trust is considering giving Madsen Company a loan. Before doing so, it decides that further discussions with Madsen's accountant may be desirable. One area of particular concern is the Inventory account, which has a year-end balance of
Ending inventory?physical count
$280,970
1. No effect?title passes to purchaser upon shipment when terms are FOB shipping point
0
2. No effect?title does not transfer to Madsen until goods are received
0
3. Add to inventory: Title passed to Madsen when go
Weighted-average unit cost
cost of goods available for sale/total units available for sale
Inventory turnover ratio
(costs of goods sold / (beg. inv. - end inv. / 2))
Days in inventory
365/inventory turnover ratio
Three classifications of a manufacturing company
Raw Materials
Work in Process
Finished Goods
Physical Inventory taken for two reasons:
Perpetual System
Periodic System
Check accuracy of inventory records.
Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft).
Perpetual System
Determine the inventory on hand
Determine the cost of goods sold for the period.
Periodic System
Involves counting, weighing, or measuring each kind of inventory on hand.
Physical Inventory
Taken when the business is closed or business is slow and at end of the accounting period.
Physical Inventory
Purchased goods not yet received.
Sold goods not yet delivered.
Goods in transit - determined by the terms of sale
Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.
FOB Shipping point
Ownership of the goods remains with the seller until the goods reach the buyer.
FOB Destination
Goods held for sale by one party although ownership of the goods is retained by another party.
Consigned goods
Unit costs can be applied to quantities on hand using the following costing methods:
Specific Identification
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average-cost
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average-cost
Cost Flow assumptions
Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.
Specific Identification
Practice is relatively rare.
Most companies make assumptions (Cost Flow Assumptions) about which units were sold.
Specific Identification
(physical flow costing method)
does not need to equal
Physical Movement of Goods
Cost Flow Assumption
Earliest goods purchased are first to be sold.
Often parallels actual physical flow of merchandise.
Generally good business practice to sell oldest units first.
FIFO
Latest goods purchased are first to be sold.
Seldom coincides with actual physical flow of merchandise.
Exceptions include goods stored in piles, such as coal or hay.
LIFO
Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.
Assumes goods are similar in nature.
Average-cost
Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.
Average-cost
total cost / number of units
cost per unit
number of units left * price
Ending inventory
amount earned - ending inventory
costs of goods sold
difference of sales and cost of goods sold
gross profit
In Period of Rising Prices, FIFO Reports:
______ cost of goods sold and ______ income/inventory
lowest
highest
In Period of Rising Prices, LIFO Reports:
______ cost of goods sold and ______ income/inventory
Highest
lowest
Method should be used consistently, enhances comparability.
Although consistency is preferred, a company may change its inventory costing method.
Inventory Costing (cost flow methods)
When the value of inventory is lower than its cost
Companies can "write down" the inventory to its market value in the period in which the price decline occurs.
Market value = Replacement Cost
Example of conservatism.
Lower-of-Cost-or-Market
_____________ - may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage).
High Inventory Levels
___________- may lead to stockouts and lost sales.
Low Inventory Levels
cost of goods sold / average inventory
Inventory turnover ratio
365/inventory turnover ratio
days in inventory
Common Causes of Inventory errors
Failure to count or price inventory correctly.
Not properly recognizing the transfer of legal title to goods in transit.
Errors affect both the income statement and balance sheet.
Inventory errors affect the computation of cost of goods sold and net income.
Income Statement Effects
Understate beginning inventory
Cost of goods sold - understated
Net income - overstated
Overstate beginning inventory
Cost of goods sold - overstated
Net income - understated
Understate ending inventory
Cost of goods sold - overstated
Net income - understated
Overstate ending inventory
Cost of goods sold - understated
Net income - overstated
Inventory errors affect the computation of cost of goods sold and net income in ____ periods.
two
An error in ending inventory of the current period will have a _________ on net income of the next accounting period.
reverse effect
Over the two years, the total net income is correct because the errors ______ each other.
offset
_________ depends entirely on the accuracy of taking and costing the inventory.
Ending Inventory
Effect of inventory errors on the balance sheet is determined by using the basic accounting equation
Balance sheet effects
Beg. Inv + Cost of goods sold - End inv.
Cost of Goods sold