ACCT 370 - Chapter 7

Inventory

Assets for sale in ordinary course of business a) Goods controlled by a company b) Held either for use in the manufacture of products or as merchandise awaiting sale

COGS formula

COGS = beginning inventory + purchases (net) - ending inventory

Initial measurement of inventory

Include costs to acquire goods and to prepare them for sale to customers a. Examples: purchase costs, freight-in, transportation insurance, sales tax, storage fees (all are capitalized) b. Reduce initial measurement by purchase (cash) discounts c. Expense period costs (e.g., selling, general and administrative, interest) in the period incurred.

Included or Excluded from ending inventory? Inventory sold with an obligation to later repurchase the inventory at a specified price

Included

Included or Excluded from ending inventory? Merchandise inventory out at a dealer, on consignment

Included

Included or Excluded from ending inventory? Merchandise inventory purchased, in transit, shipped fob shipping point

Included

Included or Excluded from ending inventory? Merchandise inventory sold, in transit, shipped fob destination

Included

Indicate which costs would be included in the initial measurement of merchandise inventory - Sales tax on merchandise purchased

Included ( cost of getting the inventory ready)

Indicate which costs would be included in the initial measurement of merchandise inventory - Labor costs for assembly to merchandise for sale

Included ( cost to get inventory ready)

Indicate which costs would be included in the initial measurement of merchandise inventory - Labor costs for unloading truck of fragile merchandise received from vendor

Included (getting the inventory ready)

Indicate which costs would be included in the initial measurement of merchandise inventory - Insurance on merchandise stored before sale

Included (key word: before sale)

Goods in transit fob shipping from supplier to merchandiser

Inventory of merchandiser

Goods in transit shipped fob destination from supplier to merchandiser

Inventory of supplier

Included or Excluded from ending inventory? Inventory held on consignment for another company

Excluded

Included or Excluded from ending inventory? Merchandise inventory purchased, in transit, shipped fob destination.

Excluded

Included or Excluded from ending inventory? Merchandise inventory sold, in transit, shipped fob shipping point

Excluded

Indicate which costs would be included in the initial measurement of merchandise inventory - Cost of freight to ship merchandise to customer

Excluded ( it has been sold so it is not included in inventory)

Indicate which costs would be included in the initial measurement of merchandise inventory - Water damage to merchandise held for sale due to flood

Excluded (inventory is already on the shelves)

Physical goods included in inventory

all goods controlled by a company should be recognized on a company's balance sheet as inventory regardless of their location

Periodic inventory system

a. physical inventory count take at end of a reporting period b. COGS determined after physical inventory count c. Temporary accounts are used until inventory is adjusted based on physical inventory count (examples: purchases; freight-in; purchase discounts; purchase returns and allowances)

goods under repurchase agreements

a. Agreements to sell and later buy back inventory items at prearranged prices b. provides a way for a company to finance its inventory purchases (the seller gains immediate access to cash) c. seller retains control of the inventory (included on balance sheett)

Perpetual Inventory system

a. Detailed inventory records are maintained as inventory is purchased and sold b. Inventory & COGS are adjusted directly and continually c. Physical inventory counts verify inventory amounts

Goods on Consignment

a. company (consignor) ships goods to a distributor (consignee) but retains legal title of the goods until the sale of the product to a customer b. goods on consignment should be included in inventory of the consignor (owner of the inventory) c. inventory held on consignment by the consignee should be excluded from the consignee's inventory

cosigned inventory, owned by a consignor but held by a consignee

inventory of consignor

goods in transit shipped fob shipping from a merchandiser to a customer

inventory of customer

Goods in transit shipped fob destination from a merchandiser to a customer

inventory of merchandiser

inventory sold to a customer with seller repurchase requirements

inventory of seller

Goods shipped FOB destination

legal title passes when buyer receives goods from carrier

Goods shipped FOB shipping point

legal title passes when goods are released to carrier (Fed ex, UPS)