Define Inventory
It’s asset held for sale or goods that will be used or consumed in the production of goods sold
What are the 2 major classifications of inventories
- inventories of merchandising business
- inventories of manufacturing business
What is the inventory of merchandising business
They are merchandise that were purchased for resale and they’re called merchandise inventories
What is the inventory of manufacturing business
They are business that produce physical output
What are the 3 types of inventories for manufacturing business
- raw material inventory
- work in process
- finished goods inventory
What is ram material inventory
Cost assigned to goods and material on hand but not yet placed in to production
What is work in process inventory
Cost of raw material on which production had been started but not completed + direct labor cost and allocated manufacturing overhead cost
What is finished goods inventory
Cost identified with the completed but unsold unit on hand at the end of period
Why is merchandise purchased and sold the most active elements in merchandising business
- Sale of merchandise is biggest revenue
- Cost of those merchandise is the largest deduction from sales
- Ending inventories are the largest of the current asset
What will an error in the determination of the inventory system at the end of the period cause
- an equal misstatement of gross profit and net income
- same incorrect amount for assets and owners equity
What the relationship between ending inventory and cost of good sold
Negative
If EI is understated, the CGS will be overstated, vice versa
What the relationship between ending inventory and gross profit
Direct or positive
If EI is understated the GP will be understated
What the relationship between ending inventory and operating income
Positive
GP and operating income have direct relationship
What the relationship between ending inventory and current balance
Positive
What the relationship between ending inventory and liabilities
It had no effect
What the relationship between ending inventory and owners equity
Positive
What the relationship between beginning inventory and CGS
Direct
What the relationship between beginning inventory and gross profit
Negative
What the relationship between beginning inventory and net income
Negative
Same as gross profit
What the relationship between beginning inventory and current asset
No effect on current assets
What the relationship between beginning inventory and owners equity
If the error is from previous year then there’s no effect but if it’s from this period it will have an indirect effect
What are the 2 types of accounting for inventories
Periodic and perpetual
What is periodic inventory system characteristic
- there is no continuous record of merchandise inventory account
- when goods are purchased they are debited to purchase account
- revenue is recorded each time a sale is made
- no entry for CGS
- it’s taken periodically to determine cost of goods on hand and sold
- less costly to maintain
- gives management less info about current status of merchandise
What the perpetual system characteristics
- record continuously the amount of inventory
- inventory balance is not the same throughout
- no purchase discount or return
- CGS is recorded at the time of sale
- best when having a diverse and large number of items, it helps keep track
