Chapter 5

Classification of Merchandise inventory

Goods in Transit, Goods on consignment, goods damaged or obsolete

FOB shipping point

Goods included in buys inventory when shipped. Belongs to buyer once shipped. Product is transferred to Buyer

FOB destiation

good’s included in buyer’s inventory after arrival at destination. Belongs to the seller until it has reached the buyer. Product still belongs to seller.

Consignor

owner of goods

Merchandise is included in the inventory of the consignor

Cosignee

sells goods for the owner

Consignee never reports consigned goods in inventoryu=

Goods Damaged or Obsolete

Damaged goods are not reported in inventory if they can’t be sold.

Damaged goods that can be sold are included in inventory.

Loss is recorded when damage or obsolescence occurs

Net realizable value

= sales price - selling costs

Inventory Costs

Invoice cost - discounts + incidental costs

Incidental costs

Shipping, Storage, and insurance

FIFO

First in First Out

Ending inventory approximates current cost

Overstates Net income

LIFO

Last in First Out

Cost of goods sold on income statement approximates it current costs

Overstates cost of goods sold

Weighted average

Total cost of units/Total units

Smooths out price changes

Specific identification

Specifically tells you what units are kept and sold

Ending inventory Understated

Year 1
Cost of goods sold overstated

Net income understated

Year 2

Cost of goods sold understated

Net income overstated

Ending Inventory Overstated

Year 1
Cost of goods sold understated

Net income overstated

Year 2

Cost of goods sold overstated

Net income understated

Inventory turnover

Cost of goods sold/ Average Inventory

Average inventory = (Beg. Inv./End Inv.)/2)

Days sales in inventory

Ending Inventory/Cost of goods sold * 365

Perpetual weighted average

Cost of goods available for sale / Units on hand on the date of sale