Inventory Reporting, Cost Flow Methods, and Valuation Techniques in Accounting

What is inventory?

Goods a company owns and intends to sell to customers.

What are the two main types of companies that have inventory?

Merchandising companies and manufacturing companies.

What inventory does a merchandising company have?

Only merchandise inventory (finished goods).

What are the three types of inventory for a manufacturing company?

Raw Materials, Work in Process, Finished Goods.

What are raw materials?

Basic materials used in production that have not yet been used.

What is work in process inventory?

Inventory that has started production but is not finished.

What are finished goods?

Completed products ready for sale.

What are the two inventory systems?

Perpetual and Periodic.

What is a perpetual inventory system?

Inventory and cost of goods sold are updated continuously after each transaction.

What is a periodic inventory system?

Inventory is determined only at the end of the period by physical count.

In a periodic system, how is cost of goods sold calculated?

Beginning Inventory + Purchases − Ending Inventory.

When must a company take a physical inventory?

At the end of the accounting period.

What determines whether goods in transit are included in inventory?

Shipping terms (FOB shipping point or FOB destination).

What does FOB shipping point mean?

Ownership transfers when goods are shipped; buyer owns goods during transit.

Under FOB shipping point, who includes goods in inventory during transit?

The buyer.

What does FOB destination mean?

Ownership transfers when goods are delivered; seller owns goods during transit.

Under FOB destination, who includes goods in inventory during transit?

The seller.

What are consigned goods?

Goods held for sale by one party but owned by another.

Are consigned goods included in inventory by the holder?

No, only the owner includes them.

What are cost flow assumptions?

Methods used to assign costs to cost of goods sold and ending inventory.

What are the three cost flow methods?

FIFO, LIFO, Average Cost.

What does FIFO stand for?

First-In, First-Out.

Under FIFO, which inventory is sold first?

The oldest inventory.

Under FIFO, which costs go to cost of goods sold?

The oldest costs.

Under FIFO, which costs remain in ending inventory?

The newest costs.

When prices are rising, FIFO results in what for COGS?

Lowest COGS.

When prices are rising, FIFO results in what for net income?

Highest net income.

When prices are rising, FIFO results in what for inventory value?

Highest inventory value.

What does LIFO stand for?

Last-In, First-Out.

Under LIFO, which inventory is sold first?

The newest inventory.

Under LIFO, which costs go to cost of goods sold?

The newest costs.

Under LIFO, which costs remain in ending inventory?

The oldest costs.

When prices are rising, LIFO results in what for COGS?

Highest COGS.

When prices are rising, LIFO results in what for net income?

Lowest net income.

When prices are rising, LIFO results in what for taxes?

Lowest taxes.

What is the average cost method?

Inventory cost per unit is calculated by dividing total cost by total units.

What is the formula for average cost per unit?

Total cost ÷ Total units available for sale.

Under average cost, how are COGS and ending inventory calculated?

Multiply average cost per unit by units sold and units remaining.

Compared to FIFO and LIFO, average cost results are usually?

In between FIFO and LIFO.

When prices are rising, which method gives the lowest COGS?

FIFO.

When prices are rising, which method gives the highest COGS?

LIFO.

When prices are rising, which method gives the highest net income?

FIFO.

When prices are rising, which method gives the lowest net income?

LIFO.

When prices are rising, which method gives the highest inventory value?

FIFO.

When prices are rising, which method gives the lowest inventory value?

LIFO.

What does LCNRV stand for?

Lower of Cost or Net Realizable Value.

What is Net Realizable Value (NRV)?

Estimated selling price minus estimated costs to complete and sell.

How is inventory reported under LCNRV?

At the lower of cost or net realizable value.

Why is LCNRV used?

To avoid overstating inventory value.

What does inventory turnover measure?

How many times inventory is sold during the year.

What is the formula for inventory turnover?

Cost of Goods Sold ÷ Average Inventory.

What is average inventory?

(Beginning Inventory + Ending Inventory) ÷ 2.

What does a high inventory turnover mean?

Inventory is selling quickly.

What does a low inventory turnover mean?

Inventory is selling slowly.

What does days in inventory measure?

Average number of days inventory is held before being sold.

What is the formula for days in inventory?

365 ÷ Inventory Turnover.

If ending inventory is understated, what happens to COGS?

COGS is overstated.

If ending inventory is understated, what happens to net income?

Net income is understated.

If ending inventory is overstated, what happens to COGS?

COGS is understated.

If ending inventory is overstated, what happens to net income?

Net income is overstated.

If ending inventory is overstated, what happens to assets?

Assets are overstated.

If ending inventory is understated, what happens to equity?

Equity is understated.