ACC 212: Chapter 7 ( reading)

Periodic Updating

:Beginning Inventory + Purchases − Ending Inventory = Cost of Goods Sold

Then you calculate the weighted average cost per unit using the following formula: WeightedAverage Cost =Cost of Goods Available for SaleNumber of Units Available for Sale=$41050 units=$8.20per unit

WeightedAverage Cost =Cost of Goods Available for SaleNumber of Units Available for Sale=$41050 units=$8.20per unit

consignment inventory

an arrangement in which the supplier maintains title to the inventory until it is used ( reported by the owner not the company)

Goods in transit

are inventory items being transported. This type of inventory is reported on the balance sheet of the owner, not the company transporting it

In a perpetual inventory system, the weighted average cost must be calculated each time a sale is recorded. Using the same two steps shown in the body of the chapter:

(1) calculate the total cost of the goods available for sale and (2) divide by the number of units available for sale.

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(1) it's easily replaced by identical goods at a lower cost or (2) it's become outdated or damaged. The first case is common for high-tech electronics -As companies become more efficient at making these cutting-edge products, they become cheaper to make.

the costs of goods purchased are added to Inventory (on the balance sheet).

(on the balance sheet)

The last-in, first-out (LIFO) method assumes the newest goods

(the last in to inventory) as of the date of the sale are the first ones sold (the first out of inventory)

Just- in time

An inventory-management approach in which supplies arrive just when needed for production or resale

If a perpetual inventory method is used, what is "forced out" using the cost of goods sold equation?

Cost of ending inventory

If a periodic inventory method is used, what is "forced out" using the cost of goods sold equation?

Cost of goods sold

What is the cost of goods available for sale allocated to?

Cost of goods sold reported on the income statement and ending inventory reported on the balance sheet

inventory mangement

Developing and maintaining adequate assortments of products to meet customers' needs

When inventory value falls below its cost,

GAAP requires the inventory to be written down to its lower value. This rule is known as reporting inventories at the lower of cost or market/net realizable value (LCM/NRV).

Given the financial statement effects, you might wonder why a company would ever use a method that produces a smaller inventory amount and a larger cost of goods sold.

The answer is suggested in Exhibit 7.5, in the line Page 315called Income Tax Expense

Inventory is reported as a(n) ______ on the:

current asset balance sheet

Other errors can occur when using

either a periodic or perpetual inventory system by using inappropriate quantities or unit costs.

Periodic requires you to use the cost of goods

in Ending Inventory to force out the Cost of Goods Sold (so you cannot determine shrinkage).

If a cost goes into Inventory, it doesn't go

into Cost of Goods Sold. Thus, the method that assigns the highest cost to ending Inventory will assign the lowest cost to Cost of Goods Sold

specific identification method

inventory costing method that matches or identifies each unit of inventory with its actual cost ;individually identifies and records the cost of each item sold as Cost of Goods Sold This method requires accountants to keep track of the purchase cost of each item.

Because inventory will be used or converted into cash within one year,

it is reported on the balance sheet as a current asset.

Types of Manufacturers inventory

raw, work in process, and finished Goods inventory

the failure to correctly apply the LCM/NRV rule

to ending inventory is considered an error.

The primary goals of inventory mangers are to

1.Maintain a sufficient quantity of inventory to meet customers' needs. 2.Ensure inventory quality meets customers' expectations and company standards. 3.Minimize the cost of acquiring and carrying inventory (including costs related to purchasing, production, storage, spoilage, theft, obsolescence, and financing). - if one changes so do the others

The weighted average cost method is

applied in two steps. The first step is to calculate the total cost of the goods available for sale. You multiply the number of units at each cost by the cost per unit and then sum these amounts to get the total cost:

Four generally accepted inventory costing methods

are available for determining the cost of goods sold and the cost of goods remaining in ending inventory; regardless of whether a company uses a perpetual or periodic inventory system.

these three other inventory costing methods ....

are not based on the physical flow of goods on and off the shelves. Instead, these methods are based on assumptions accountants make about the flow of inventory costs.

The costs of goods sold are removed from Inventory and reported

as an expense called Cost of Goods Sold (on the income statement).

Last-in, first-out (LIFO)

assumes the inventory costs flow out in the opposite of the order the goods are received.

First-in, first-out (FIFO)

assumes the inventory costs flow out in the order the goods are received.

inventory mangement :risk of poor quality

bad rep warning clam stop production

inventory that has been sold become a ________ on the ______

cost of goods sold ( expense) on the income statement

Inventory Turnover Ratio

cost of goods sold/average inventory

summarizes the financial statement effects of the FIFO, LIFO, and weighted average cost methods. Remember these methods differ

only in the way they split the cost of goods available for sale between ending Inventory and Cost of Goods Sold

Consignment inventory

refers to goods a company is holding on behalf of the goods' owner. his arises 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 the goods are difficult to sell.

inventory mangement: Risk of excessive inventory

skrinages damage spoiled loss oppunity for sells

The method chosen does not have to correspond to the physical flow of goods,

so any one of these four methods is acceptable under GAAP in the United States.

consignment inventory

stock that is owned by the supplier but is in the physical possession of the buyer potty clostest

raw materials inventory

such as plastic, steel, or fabrics. When these raw materials enter the production process, they become part of work in process inventory,

When a company sells goods,

t removes their cost from the Inventory account and reports the cost on the income statement as the expense Cost of Goods Sold.

As the cost of goods sold equation indicates, a direct relationship exists between ending inventory and cost of goods sold because items not in the ending inventory are assumed to have been sold. Thus, any errors in ending inventory will affect

the balance sheet (current assets) and the income statement (Cost of Goods Sold, Gross Profit, and Net Income). The effects of inventory errors are felt in more than one year because the ending inventory for one year becomes the beginning inventory for the next year.

Regardless of the reason, errors in inventory can significantly affect both

the balance sheet and the income statement.

The costs remaining in Inventory at the end of a period become

the cost of Inventory at the beginning of the next period.

The last-in, first-out (LIFO) method assumes

the newest goods (the last in to inventory) are the first ones sold (the first out of inventory).

The first-in, first-out (FIFO) method assumes

the oldest goods (the first in to inventory) are the first ones sold (the first out of inventory).

Notice that although they're called "inventory" costing methods,

their names actually describe how to calculate the cost of goods sold.

merchandise inventory

which consists of products acquired in a finished condition, ready for sale without further processing. Manufacturers often hold three types of inventory, with each representing a different stage in the manufacturing process

The only difference is perpetual allows you to

"force out" the cost of Ending Inventory so that it can be compared to the cost of goods actually on hand (to determine shrinkage)

Merchandise inventory is bought by merchandisers in a ready to sell format. When raw materials enter a manufacturer's production process, they become work in process inventory, which is further transformed into finished goods that are ultimately sold to customers. *Are goals of a manager charged with overseeing inventory?

- ensuring inventory quality meets the customers expecations and company standards -maintaining a sufficient quantity of inventory - minimize the cost of carrying inventory

When costs are rising, as they were in our example, FIFO produces

-a larger inventory value (making the balance sheet appear to be stronger) and a smaller cost of goods sold (resulting in a larger gross profit, which makes the company look more profitable). -When costs are falling, these effects are reversed; FIFO produces a smaller ending inventory value and a larger cost of goods sold—a double whammy. -These are not "real" economic effects, however, because the inventory cost flow assumption does not affect the number of units sold or held in ending inventory

Weighted average cost

-an inventory costing assumption that uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory -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.

Perpetual Updating

:Beginning Inventory + Purchases − Cost of Goods Sold = Ending Inventory

The relationships among beginning inventory (BI), purchases (P), ending inventory (EI), and cost of goods sold (CGS) are:

BI + P − EI = CGS or BI + P − CGS = EI.

Perpetual cost of goods sold Updating Formula

Beginning inventory + purchases- cost of goods sold

cost of goods sold periodic update

Beginning inventory + purchases- ending inventory

how cost flow assumptions are applied in a periodic inventory system, even though most modern companies use perpetual inventory systems

First, only the LIFO and weighted average calculations differ between periodic and perpetual inventory systems. Second, most LIFO companies actually use FIFO during the period and then adjust to LIFO at the end of the period. By waiting to the end of the period to calculate this LIFO adjustment, it's as if all purchases during the period were recorded before the Cost of Goods Sold is calculated and recorded Third, companies typically adjust their records at year-end to match a physical count of the inventory on hand, so as a practical matter, these companies are in substance on a periodic costing system.

the effect on Cost of Goods Sold affects many other items on the income statement including

Gross Profit, Income from Operations, Income before Income Tax Expense, Income Tax Expense, and Net Income.

How can you tell whether an increase in a company's inventory balance is good news or bad news?

If the increase occurs because management is building up stock in anticipation of higher sales, it could be good news. But if it results from an accumulation of old inventory items that nobody wants, it is probably bad news.

inventory mangement: risk of running out

loss of customer loss reputation loss of future sales

work in process inventory

materials inventory that is currently in the process of being converted into finished goods. which includes goods that are in the process of being manufactured.

cost of goods sold

net sales minus gross profit

exessive quality

output greater then custormer willing to pay

finished goods inventory,

which is ready for sale just like merchandise inventory

Goods placed in inventory are initially recorded at cost,

which is the amount paid to acquire the asset and prepare it for sale.

When faced with increasing costs per unit, as in our example, a company that uses FIFO

will have a larger income tax expense. This income tax effect is a real cost, in the sense that the company will actually have to pay more income taxes in the current year, thereby reducing the company's cash.