Chapter 7: Inventory and Cost of Goods Sold

Inventory

Goods held for sale in the normal course of business or used in producing other goods for sale

Merchandise Inventory

Consists of products acquired in a finished condition, ready for sale without further processing

• merchandisers hold this

Raw Materials Inventory

Raw goods that enter the production process

• EX: plastic, steel, or fabrics

Work in Process Inventory

Goods that are in the process of being manufactured

Finished Goods Inventory

Completed manufacturing process, ready for sale just like merchandise inventory

Consignment Inventory

Goods a company is holding on behalf of the goods’ owner

• reported on the balance sheet of the owner, not the company holding the inventory

Goods in Transit

Inventory items being transported

• reported on the balance sheet of the owner, not the company transporting

Inventory Management Decision: Maintain sufficient ________ of inventory to meet consumers’ needs

quantity

Inventory Management Decision: Ensure inventory _______ meets consumers’ expectations and company standards

quality

Inventory Management Decision: Minimize the ____ of acquiring and carrying inventory

cost

Specification Identification Method

Method of assigning costs to inventory that identifies the cost of each specific item purchased and sold

First-In, First-Out (FIFO)

Assumes that the first goods purchased (the first in) are the first goods sold

Last-In, First-Out (LIFO)

Assumes the inventory costs flow out in the opposite of the order the goods are received

Weighted Average Cost

Uses the weighted average of the costs of goods available for sale for both the cost of each item sold and those remaining in inventory

• cost of goods available for sale/number of goods available for sale

Lower Cost or Market/Net Realizable Value (LCM/NRV)

Valuation method departing from the cost principle; recognizes a loss when inventory value drops below cost

Inventory Turnover

Process of buying and selling inventory

• cost of goods sold/average inventory

Days to Sell

Measure of the average number of days from the time inventory is bought to the time its sold

• 365/inventory turnover rate

Data Visualization

Representations of data using visual displays such as charts, graphs, maps, and plots