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 It's become outdated or damaged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