Chapter 6: Cost of Goods Sold and Inventory. ACCT 2110 (Miller) Exam 3

Four Inventory Costing methods

- Specific Identificiation - First in, first out (FIFO) - Last in, First out (LIFO) - Average Cost

Avg. Days to Sell Inventory

365 days/ Inventory Turnover= Avg. Days to Sell inventory.

Periodic Inventory System

A ______ _______ ______, does not require companies to keep details, up-to-date inventory records. This system records the cost of purchases as they occur (in an account separate from the inventory account), takes a physical count of inventory at the end of the period, and applies the COGS model to determine the balances of End. Inv. and COGS. If a company using this system wants to know the balance of inventory or COGS during a period, they must either perform a physical count of inventory or estimate the amount of inventory.

Gross Margin (gross profit)

A key performance measure, that is defined as sales revenue minus cost of goods sold. ______ _______ indicates the extent to which the resources generated by sales can be used to pay operating expenses and provide for net income.

Purchase Discounts

Accumulates the amount of discounts on purchases taken during the period.

Purchase Returns and Allowances

Accumulates the cost of any merchandise returned to the supplier or any reductions in the purchase price granted by the seller.

Transportation In

Accumulates the cost paid by the purchaser to transport inventory from suppliers.

Merchandiser (either retailers or wholesalers)

Are companies that purchase inventory in a finished condition and hold it for resale without further processing.

Transportation Costs

Are expenditures made to move the inventory from the seller's location to the purchaser's location. The recording of it depends on who pays for the _________.

Retailers

Are merchandisers that sell directly to consumers.

Wholesalers

Are merchandisers that sell to other retailers.

Raw Materials Inventory

Are the basic ingredients used to make a product. When these _____ ______ are purchased, the _______ _______ Inventory account is increased. They eventually become part of work-in-process.

Inventory Turnover Ratio

COGS/ Average Inventory= Inventory turnover

Sales

Companies recognize _______ revenue when it is earned and collection of cash is reasonably assured. First Journal Entry Sales Revenue is recognized Second Journal Entry Recognizes COGS Reduces Inventory account

Purchase Discounts

Companies that are purchasing goods look at sales discounts (Ch. 5) as _______ discounts. If a ______ discount is taken, the purchaser reduces the inventory account for the amount of the discount taken. resulting in the inventory account reflecting the net cost of the purchase.

Merchandisers or Manufacturers

Companies whose main purpose is to sell inventory.

Work-in-Process Inventory

Consists of the raw materials that are used in production as well as other production costs such as labor and utilities. These costs stay in this account until the product is complete. Then moved to finished goods inventory account.

Sales Returns and Allowances

If a customer returns an item for some reason, the company will make an adjustment to sales. Second entry to decrease COGS and increase inventory to reflect the return of the merchandise.

Perpetual Inventory System

In a ______ ______ _______, balances for inventory and COGS are continually (________) updated with each sale or purchase of inventory. This inventory system records both the revenue and cost side of sales transaction. Keeps an up-to-date record of both ending inventory and COGS at any point in time.

Inventory Cost

Includes the purchase price of the merchandise plus any cost of bringing the goods to a salable condition and location. So purchase price + freight charges + insurance cost + various taxes.

First-IN, First-Out (FIFO)

Is based on the assumption that costs move through inventory in an unbroken stream, with the costs entering and leaving the inventory in the same order. Every time inventory is sold, the cost of the earliest purchases that make up cost of goods available for sale is allocated to COGS. the Cost of the most recent purchases is allocated to ending inventory.

F.O.B. destination

Ownership of the inventory passes when the goods are delivered to the buyer. The seller is usually responsible for paying the transportation costs. Commonly termed freight-out. In this case, the transportation costs are not considered part of inventory.

Inventory Systems

Provide the info needed to determine COGS and analyze inventory. Or the need to make special efforts to sell existing inventory. Basically they manage and control inventory.

Purchases

Refers to the cost of merchandise acquired for release during the accounting period. The purchase of inventory is recorded by increasing the inventory account.

Inventory

Represents products held for resale and is classified as a current asset on the balance sheet.

Finished Goods Inventory

Represents the cost of the final product that is available for sale. When the _______ _______ inventory is sold to a customer, it becomes an expense called COGS, goes on income statement.

Consigned Goods

Sometimes goods owned by one party are held and offered for sale by another. This arrangement is called a _________. The seller or consignee earns a fee when the ______ ______ are sold, but the original owner or consignor retains ownership of the goods. The goods are not included in the sellers inventory.

Inventory Cost Method Process

Step 1- Calculate the cost of goods available for sale immediately prior to any sale transaction Step 2- Apply the inventory costing method to determine ending inventory and COGS. Step 3- Repeat Steps 1 and 2 for all inventory transactions during the period. The Sum of COGS computed in Step 2 is the COGS for the period. Ending Inventory is the amount computed during the final application of step 2.

Purchases

The ______ account accumulates the cost of the inventory acquired during the period.

Purchase Returns and Allowances

The cost of merchandise returned to suppliers is called a ________ return. The purchaser may keep the merchandise if the seller presents a _______ allowance. A _______ ________ or __________ is recorded by decreasing inventory.

Cost of Goods Sold (or cost of sales.)

The cost of the inventory becomes an expense called ______ __ _____ ______. ______ ___ ______ ______ represents the outflow of resources caused by the sale of inventory and is the most important expense on the income statement for companies that sell goods. It is the cost to the seller of all goods sold during the accounting period.

Recording Purchase Transactions.

The inventory account is increased for the invoice price of a purchase as well as any transportation costs paid for by the buyer. Any purchase discounts, returns, or allowances reduce the inventory account.

Merchandise Inventory

The inventory held by merchandisers is termed _______ ________. This is an asset. When it is sold it becomes COGS, which appears on the income statement.

Periodic Inventory System

The inventory records are not kept continually, or perpetually, up to date. Instead the inventory account is updated at the end of the period based on a physical count of the inventory on hand. Purchase transaction are recorded in one of four temporary accounts. These four accounts are used to compute COGS.

Cost of Goods Sold Model

The relationship between COGS and Inventory: Beginning Inventory + Purchases =Cost of goods Available for sale - Ending inventory = Cost of Goods Sold

Cost of Goods Available for Sale

The sum of beginning inventory and purchases represent the _____ ___ ______ _______ _____ _____. The portion of this for sale that remains unsold at the end of the year is the company's ending inventory. Which is the beginning inventory for the next period. The portion of _____ ___ ______ _______ ____ _____ that is sold becomes COGS.

Recording Inventory Effects of Sales Transactions

The use of a perpetual inventory system requires that 2 journal entries be made for both sales and sales returns transaction. Sales Journal Entries Cash Sales Revenue (recorded sale to customer) Cost of Goods Sold Inventory (Recorded cost of merchandise sold) Sales Return Entries Sales Returns and Allowances Cash (recorded return of merchandise) Inventory Cost of Goods Sold (recorded cost of merchandise returned.)

Last-In, First-OUt (LIFO)

This method allocates the COGAS based on the assumption that the most recent purchases are the first to be sold. Most recent purchases (newest costs) are allocated to COGS and earliest purchases (oldest costs) are allocated to inventory.

Advantage of a Periodic System

This system is relatively inexpensive to operate. Because perpetual systems require more data than periodic systems. However with technology advancing this advantage is disappearing.

Advantage of a Perpetual System

This system makes the balances of inventory and COGS continuously available. This provides greater control over inventory.

Lower of Cost of Market Rule.

Under LCM, if the market value of a company's inventory is lower than its cost, the company reduces the amount recored for inventory to its market value.

Manufacturers

are companies that buy and transform raw materials into a finished product which is then sold. These companies classify inventory into 3 categories, raw materials, work-in-process, and finished goods.

F.O.B. Shipping Point

ownership of the inventory passes from the seller to the buyer at the shipping point. The buyer normally pays the transportation costs, commonly termed freight-in. The inventory account is increased.

Average Cost (moving average method)

this method allocates the COGAS based on a weighted average cost per unit. Weighted Average Cost Per Unit= COGAS/Units Available for sale Ending Inv.= Units on Hand x Weighted average cost COGS= Units Sold x Weighted Average Cost