ACCT 2110 Auburn Leffler Exam 3

Inventory

A tangible resource that is held for resale in the normal course of operations.

Intended for Sale

differentiates inventory from other operational assets

Cost of Goods Sold

an expense incurred when inventory is sold, representing the direct costs attributable to the goods sold during a specific period | the cost to the seller of all inventory sold during the accounting period

Gross Profit (or Gross Margin)

the amount of resources that are left to pay operating expenses and provide for net income

Gross profit equation

Revenue - COGS = Gross Profit

Merchandisers

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

Manufacturers

companies that buy and transform raw materials into a finished product which is then sold

Raw Materials

basic ingredients used to make a product

Work in Process

raw materials used in production plus other production costs such as labor

Finished Goods

cost of final product available for sale

COGS equation

Beginning inventory + purchases = cost of good available for sale - ending inventory = COGS

periodic inventory system

cost of goods sold are recorded only at the end of a period

perpetual inventory system

cost of goods sold updated with each sale

fob shipping point

ownership of the inventory passes from seller to buyer at the shipping point and buyer pays and includes transportation costs termed as freight-in

fob destination

ownership of the inventory passes from seller to buyer when goods are delivered. Seller pays transportation costs termed as freight-out

fifo (first in, first out)

earliest goods purchased are the first to be sold and first units purchased are the first to be allocated to COGS (aligns more closely with the actual flow of goods)

lifo (last in, first out)

last goods purchased are the first to be sold and last units purchased are the first to be allocated to COGS (seldom reflects the actual flow of goods)

weighted average

takes the average cost of all units available for sale and it smooths out fluctuations in costs and is relatively simple to calculate

consignments

goods owned by one party are held and offered for sale by another

understated beginning inventory

cogs understated

ei overstated

net income overstated

overstated beginning inventory

cogs overstated

ei understated

net income understated

nrv

nrv of inventory = estimated selling price - costs of disposal (selling costs)

when nrv of inventory is lower than its original cost, the valuation of inventory is adjusted down

gross profit ratio

the amount of money left after subtracting cogs from revenue

helps assess ability to generate profit from operations

gross profit / net sales

inventory turnover ratio

how efficiently a company manages its inventory

higher ratio means the company is effectively managing its inventory

cogs / avg inventory

average days to sell inventory

how long does it take to convert inventory to a sale

365 days / inventory turnover

operating assets

long-lived assets that are used by the company in the normal course of operations

property, plant and equipment

tangible assets

depreciation expense

intangible assets

no physical substance

amortization expense

natural resources

depletion expense

cost

all expenses necessary to acquire and make an asset ready to use

depreciation

process of allocating to expense the cost of an asset over its useful life

straight-line depreciation

equal amount of depreciation expense each year

declining balance

depreciation expense is calculated on a declining book value

units of production

life of asset is expressed in terms of total units of production or activity

revenue expenditures

expensed on the income statement

does not increase the future economic benefits of the asset

capital expenditure

included in asset cost

extend the life of the asset, expand the productive capacity, increase efficiency, or improve the quality of the product

impairment

a permanent decline in the future benefit or service potential of an asset

fixed asset turnover ratio

measures how efficiently company is using its fixed assets

net sales / avg nbv of fixed assets

average age of fixed assets

older assets are less efficient

accumulated deprecation / depreciation expense