What are the Classifications of Inventory in a Merchandising Company and in a Manufacturing Company?
Where are they reported in the Statement of Financial Position?
Merchandising Company: Inventory Manufacturing Company: - Raw Materials - Work in Process - Finished Goods
Regardless of the classification, companies report all inventories under Current Assets on the Statement of Financial Position.
What are the two systems for determining Inventory Quantities?
- Perpetual System
2. Periodic System
What are the reasons for a physical Inventory in both inventory systems?
- Perpetual System
a) Check accuracy of inventory records.
b) Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft). - Periodic System
a) Determine the inventory on hand.
b) Determine the cost of goods sold for the period.
(3. because it is required by law)
How to take a Physical Inventory?
Involves counting, weighing, or measuring each kind of inventory on hand.
When is the best time for Taking a Physical Inventory?
- when the business is closed or business is slow.
- at end of the accounting period.
(3. when Inventory is low.)
What are Goods in Transit?
- Purchased goods not yet received.
- Sold goods not yet delivered.
Do Goods in Transit count as inventory?
Goods in transit should be included in the inventory of the company that has legal title to the goods.
How to determine the Legal title?
Legal title is determined by the terms of sale.
Who pays for the shipping fright when the terms of sales are FOB Shipping Point/ FOB Destination?
FOB Shipping Point: Buyer
FOB Destination: Seller
What are Consigned Goods?
Kommissionierte Waren
- Goods held for sale by one party.
- Ownership of the goods is retained by another party.
Unit costs can be applied to quantities on hand using the following costing methods:
- Specific Identification
- First-in, first-out (FIFO)
- Average-cost
Explain Specific Identification in Inventory Costing
Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.
Explain First-In-First-Out (FIFO)
- Earliest goods purchased are first to be sold.
- Often parallels actual physical flow of merchandise.
- Generally good business practice to sell oldest units first.
Explain Average Costs
- Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.
- Assumes goods are similar in nature.
- Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.
Why should companies stick to the Cost Flow Methods?
When does a company changes the Cost Flow Methods?
Method should be used consistently, enhances comparability.
Example: M&A activities
What is the Net realizable value?
Net realizable value refers to the net amount that a company expects to realize (receive) from the sale of inventory (estimated selling price in the normal course of business, less estimated costs to complete and sell).
When the value of inventory is lower than its cost…
…Companies must “write down” the inventory to its net realizable value in the period in which the price decline occurs.
Common causes for inventory errors are…
- Failure to count or price inventory correctly.
- Not properly recognizing the transfer of legal title to goods in transit.
Inventory Errors effect..
..the income statement and statement of financial position.
