AC 210: Chapter 7
Weighted average cost formula
=(cost of goods available for sale)/(number of units available for sale)
Days to sell
=365/(inventory turnover ratio)
Inventory turnover ratio
=COGS/Average inventory or =COGS/[(BI+EI)/2]
Goods available for sale (GAFS)
=beginning inventory(BI)+purchases(P)
Cost of goods sold (COGS)
=goods available for sale(GAFS)-ending inventory(EI)
Weighted average cost
Uses the weighted average of the costs of goods available for sale for both the cost of each item sold and those remaining in inventory
Declining unit costs: EI
FIFO<=WA<=LIFO
Rising unit costs: COGS
FIFO<=WA<=LIFO
Declining unit costs: COGS
FIFO>=WA>=LIFO
Rising unit costs: EI
FIFO>=WA>=LIFO
The company with a lower gross profit percentage usually has a
Faster inventory turnover
Consignment inventory
Refers to goods a company is holding on behalf of the goods owner. When a company is willing to sell the goods for the owner (for a fee) but does not want to take ownership of the goods in the event that the goods are difficult to sell.
The value of inventory can fall below its recorded cost for two reasons:
1. It's easily replaced by identical goods at a lower cost 2. It's become outdated or damaged
Lower of cost or market (LCM)
A valuation rule the requires inventory to be written down when it's market value falls below its cost
Last-in, first-out
Assumes that the inventory costs flow out in the opposite order the goods are received
First-in, first-out
Assumes that the inventory costs flow out in the order the goods are received
Perpetual updating
BI+P-COGS=EI
Periodic updating
BI+P-EI=COGS
Merchandise inventory
Consists of products acquired in a finished condition, ready for sale without further processing
Goods in transit
Inventory items being transported. This type of inventory is reported on the balance sheet of the owner, not the company transporting it.
Raw materials inventory
Inventory that starts the manufacturing process such as plastic, steel, or fabrics
Finished goods inventory
Last step of the production process in which inventory is ready for sale just like merchandise inventory
Specific identification
The inventory costing method that identifies the cost of the specific item that was sold
Work in process inventory
The second step of the production process which includes goods that are in the process of being manufactured
Tax implications and cash flow effects: FIFO
When faced with increasing costs per unit a company that uses FIFO will have a higher income tax expense
Tax implications and cash flow effects: LIFO
When faced with increasing costs per unit a company that uses LIFO will have a lower income tax expense
What goes on the balance sheet?
•Cash and cash equivalents •short term investments •inventory •accounts and notes receivable •prepaid and other expenses
What goes on the income statement?
•net sales •COGS •Gross Profit