ACG 2021 Chapter 6

Inventory

Items a company intends for sale to customers in the ordinary course of business

We report inventory as a current _____ on the balance sheet

asset

Why do we report inventory as a current asset on the balance sheet?

It is a valuable resource that the company expects to convert to cash in the near term. 

Manufacturing companies

produce the inventories they sell rather than buying them in finished form from suppliers

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

Raw materials, work-in-process, finished goods

Raw materials inventory

includes cost of components that will become a part of the finished product but haven’t been used in production

Work-in-process inventory

products that have been started in production but not yet done at the end of the period

What do the total costs of the work-in process inventory consist of?

raw materials, direct labor, and indirect manufacturing costs

What are indirect manufacturing costs also referred to as?

overhead

Finished goods inventory

cost of fully assembled inventory that is ready for sale to customers

how to get the value of total inventories in manfacturing companies

raw materials + work-in-process + finished goods (unsold components)

Merchandising companies

Don’t manufacture, they purchase finished goods and sell to customers

What can merchandising companies do except manufacturing products?

assemble, sort, repackage, redistribute, store, refriderate, deliver, or install inventory

What can merchandising companies be further classified as?

Wholesalers and retailers

Wholesalers

resell inventory to retail companies or to professional users

Retailers

purchase inventory from manufactureres or wholesalers and then sell to end users

Example of a wholesaler company

Sysco Corporation (food service company; supplies to restaurants, schools, and sporting events but doesn’t sell directly to public)

Example retailer companies

Amazon, Best Buy, Costco, Target, McDonalds

Categories of inventory of a merchandising company

a single category called inventory

In the flow of inventory costs, raw materials, direct labor, and overhead goes to _____ 

work in process

in the flow of inventory costs, work in process go to ____

finished goods

What is apart of manufacturing companies in flow of inventory costs?

raw materials, direct labor, overhead, work in process, and finished goods

In the flow of inventory costs, finished goods go to ____

inventory

What is apart of merchandising companies in the flow of inventory costs?

the inventory

In the flow of inventory costs, inventory goes turns into ____

products that go to end users

What do service companies do in the flow of inventory costs?

provide services and products to end users

Cost of goods sold

cost of inventory that was sold during the year

What is cost of goods sold also referred to as?

cost of sales, cost of revenues, or cost of products sold

Cost of goods sold is an _____ in the income statement

expense

inventory is reported as an asset on the balance sheet for the cost of inventory ___________ at the end of the year

not yet sold

How do you get the value of total inventory available for sale

Beginning inventory + Purchases during the year

Total inventory not sold goes to _____ on the balance sheet

ending inventory

ending inventory is reported as an _____ on the balance sheet

asset

Total inventory sold goes to ______ on the income statement 

Cost of goods sold

cost of goods sold is an _____ in the income statement 

expense

Revenues on multi step income statement

net of returns, allowances, and discounts

How do you get the value of gross profit on the multi step income statement 

net revenues (net sales) - cost of goods sold

multiple step income statement

an income statement that reports multiple levels of income

How do you get the value of operating income on the multi step income statement

gross profit - operating expenses

How do you get the value of income before income taxes on the multi step income statement

operating income + nonoperating revenue - nonoperating expense

How do you get the value of net income on the multi step income statement 

income before income taxes - income tax expense

inventory sales are commonly referred to as ____

sales revenue

providing services is referred to as ____

service revenue

operating income measures profitability from _____

primary operations

what type of expense is interest expense and losses on sales of investments included on?

nonoperating expenses

methods for determining inventory cost

specific identification, FIFO, LIFO, weighted average cost

specific identification method

matches each unit of inventory with its actual cost

Example of specific identification

automobile has unique serial number that we can match to an invoice identifying the actual purchase price

Total cost under cost of goods sold is found by?

actual units sold x unit cost

total cost under ending inventory is found by

actual units not sold x unit cost

FIFO, LIFO, or weighted average cost are inventory flow ____

assumptions

Why are FIFO, LIFO, and weighted average cost inventory flow assumptions?

they assume a particular pattern, but inventory doesn’t need to match the assumed flow in order for the company to use particular method

Companies are allowed to report inventory costs by ____ which units of inventory are sold or not sold even if this doesn’t match the actual flow

assuming

FIFO

inventory costing method that assumes the first units purchased (in) are the first ones sold (out)

the value for cost of goods available for sale is found by

cost of goods sold + ending inventory

in FIFO, don’t forget to count ________ as the first purchase

beginning inventory

LIFO

last units purchased (last in) are the first ones sold (first out)

companies that use LIFO use calculate ending inventory

only once per period— at the end

weighted average cost method

assume that both cost of goods sold and ending inventory consist of random mixture of all the goods available for sale

weighted average unit cost formula

(cost of goods available for sale) / (number of units available for sale)

FIFO, LIFO, or weighted average costs have ______ cost of goods sold and ending inventory amounts 

different 

sales revenue will _______ across all methods of inventory cost

be the same

gross profit will ______ across all methods of inventory cost

be different

When inventory costs are rising, FIFO results in _______

higher reported amount for inventory in the balance sheet, lower costs of goods sold, and higher reported gross profit in the income statement

when inventory costs are falling, LIFO results in _____

higher reported amount of inventory in the balance sheet, lower costs of goods sold, and higher reported gross profit in the income statement 

FIFO is also called the ______

balance sheet approach

LIFO is also called the _____

income statement approach

Primary benefit of choosing LIFO is _______

tax savings

LIFO conformity rule

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

reporting the LIFO difference

to better compare each company’s inventory and profitability, investors must adjust for the fact that managers’ choice of inventory method has an effect on reported amounts

LIFO reserve

companies that report using LIFO must also report the difference between the LIFO amount and what that amount would have been if they had used FIFO

Can a company use different methods for all its inventory

Yes

What are the two ways to record inventory transactions

Perpetual inventory system and periodic inventory system

perpetual inventory system

recording inventory purchases and sales on a perpetual (continual) basis

periodic inventory system

does not continually record inventory amounts; balance of inventory once per period 

On perpetual inventory system, what do you record when you purchase inventory on account?

Debit inventory, credit Accounts Payable

In perpetual inventory system, what do you record when you sell inventory on account

Debit Accounts Receivable and Credit Sales Revenue. Then you calculate Cost of Goods Sold. Then debit Cost of Goods Sold and credit inventory. 

simple year end adjustment from FIFO to LIFO

adjust FIFO records to LIFO basis for preparing financial statements at end of year

How do you record the LIFO adjustment?

debit cost of goods sold and credit inventory. the value should be the difference between the ending balance of inventory of FIFO vs LIFO

Freight charges

shipping or delivery charges; associated with inventory

FOB

free on board; indicates when ownership passes from the seller to the buyer

FOB shipping point

title passes when the seller ships the inventory

FOB destination

title passes when the inventory reaches the buyer’s destination

Freight in

freight charges on incoming shipments from suppliers 

How do you record freight charges

debit inventory and credit cash

When inventory is sold, the freight charges associated with that inventory become part of _____

cost of goods sold

freight out

cost of freight on shipments to customers

Where are shipping charges for outgoing inventory reported on?

the income statement

What type of expense do freight out charges fall under in the income statement?

either cost of goods sold or as an operating expense

purchase discounts (sales discounts from seller POV)

allow buyers to trim a portion of the cost of the purchase in exchange for payment within a certain period of time

How do you record a purchase discount from the buyer’s point of view?

debit accounts payable (full amount) then credit inventory (discount amount) and credit cash (full amount - purchase discount)

purchase discounts subtract from the ______ and therefore reduce _______ once those items are sold

cost of inventory; cost of goods sold

purchase returns

company finds inventory items to be unacceptable and returns to supplier

How do you record a purchase return?

debit accounts payable and credit inventory for the amount of the return

net realizable value

estimated selling price of the inventory minus costs of completion disposal and transportation; net amount a company expects to realize in cash from the sale of the inventory

once company has determined both cost and NRV, it reports ending inventory in the balance sheet at the _____ of the two amounts

lower

How to