INVENTORIES

inventories

held for sale in the ordinary course of business, in the process of production for sale, and in the form of materials or supplies to be consumed in production process or rendering of services

1. merchandising firms

2. manufacturing firms

classifications of inventories

1. merchandise inventory

2. supplies inventory

under merchandising firms we have:

• goods resold to customers at a higher pric

• all items purchased

• finished goods inventory

• work-in-process inventory

• raw materials inventory

under manufacturing firms we have:

• completed goods but unsold

• cost incurred for partially completed items

  • cost of materials held for use in manufacturing of product

periodic or perpetual

inventory record system is either

perpetual inventory system

the cost of purchases and sales are recorded directly in the inventory account, which is an asset account. Freight costs, returns of merchandise, allowances, are taken into consideration.

Balance in MI at end-year represents endimg amt

physical inventory count is done

periodic inventory system

The cost of purchases is recorded in a purchases account, which is an expenses account

Freight in is used to record freight cost paid

At the end of the period there is a physical count

remove all discounts

remove all + freight in

to get net purchase, you—-

how abt to get net cost of purchases

equal to all goods avail for sale - unsold goods at the end (MI)

cost of goods sold is ...

determination of items to be included in inventory, the costs to be included in inv, the cost flow assumption to be adopted

basic issues in inventory valuation

economic control

goods in transit

FOB shipping point

FOB destination

free on board

consigned goods

consignment

items to be included in inventory

criterion for including items in inventory is _____ rather than physical possession. It is usually consistent with possession of a legal title

• _

  • _-title passes to buyer upon shipment or when seller delivers goods to common carrier

  • _-title passes when buyer receives goods

  • _- whether seller or buyer will pay shipping expenses

• _

  • a trading arrangement where in a seller sends goods to another entity who pays the seller only as soon the consigned goods r sold

fob shipping point

fob destination

the type of fob determines which party takes responsibility for goods shipped and at which point during trasnport the responsibility is transferred

fob shipping point

fob destination point

selling

buyer is responsible for paying the freight costs incurred in transporting the merchandise from point of shipment to destination

buyer will record cost in their books as freight in

seller is responsible for costs incurred

freight cost is freight out in book of seller, classified as a _ expense in income statement of seller

consignor

consignee

cost of sales

in consignment, the company delivering the goods is called the

company receiving the goods is

upon sale of goods by consignee to third party, the costs of inventories are removed from inventory of consignor and presented as part of ______

cost

costs of purchase net of trade and cash discounts received

costs of conversion

other costs incurred in bringing the inventories to their present location and condition

primary basis of accounting for inventories is ____

the cost figure is a net trade and cash discounts, if any, and should include freight-in, taxes, and insurance

PAS 2 prescribes that cost should include the following:

cash discounts

product and period costs

variable vs absorption costing

costs included in inv

gross method

is taken

net method

is not

2 accounting methods for cash discounts

• purchase is recorded at gross price; amt of discount is recorded only if discount is/is not taken

• purchase is recorded at net price, amt of discount appears only if discount is/is not taken

other expense in income statement

in net method, if discount is not taken, the purchase discount lost account is presented as _______

product costs

period costs

incurred to produce or acquire units of inventory and are recorded in inventory account

charged to expenses as incurred such as selling and general administrative expenses; interest costs associated w getting inventories ready are expensed as incurred

variable

absorption or full costing

costing method that varies directly with production volume and is charged to products

is where all manufacturing costs, variable and fixed, direct and indirect, incurred in production are included in cost of inventory

specific identification

average cost

fifo method

cost flow assumptions

specific identification

average cost

fifo method

attributed to identified items of inventory

cost of each item is determined from average of cost of similar items at the beginning of the period and the cost of similar items purchased during the period

average

items in ending inventory and items sold are priced at _ cost of goods available during the period

moving-average method (perpetual system)

weighted-average method (periodic system)

average method can be applied in 2 ways:

cost of goods available for sale / units available for sale

average cost formula

FIFO

assumes that the items of inventory that were purchased or produced first are sold first

This method assumes that goods are used in the order that they were purchased. In periods of rising costs, the ending inventory is highest under this method

Inventories must be written down to their nrv

Of the utility of inventory is no longer on par with utility,

In the same period the decline occurred

When is the loss recognised

Lower off cost and net realisable value

Inventory should be measured at

Net realisable value

Estimated selling price in the ordinary course of business less the estimated cost of completion and estimated cost necessary to make the sale

The lower of cost

Direct method

Allowance method

Recoding inventory write down

Recording of inventory cost to the net realisable value in its inventory and cost of goods sold

Recording of market decline

Inventory turnover ratio

average days to sell

Two common financial ratios to analyse inventories

Inventory turnover ratio

Measures the average number of times a company sells inventory during a given period