chapter 6 - inventory

what is the inventory equation (what is cogs)

COGS = Beginning inventory + Purchases - Ending inventory

what is the cost of goods available

COGS = ending inventory

how do you calculate gross profit

Net sales revenue - COGS

how do you calculate operating income

gross profit - operating expenses

how do you calculate pre tax income

operating income ± other revenue, gains/losses

how do you calculate net income

pre-tax income - tax expense

how do you calculate inventory cost (COGS and Ei) with weighted average method

WAC = cost of goods available for sale ÷ total units available for sale.

COGS = WAC x # units sold

EI = WAC x # units remaining

how do you calculate LIFO adjustment

difference in reported inventory when using LIFO instead of FIFO

FIFO value - LIFO value

describe perpetual inventory system

• continuous record

• keeps records on FIFO and at the end of the year they adjust to LIFO

• purchase entries directly debit inventory

• return entries directly credit inventory

record the journal entry for purchase of inventory with perpetual system

inventory xx

• cash/AP. xx

record the journal entry for purchase returns with perpetual system

cash/AP XX

• inventory XX

record the journal entry for sale of inventory with perpetual system

cash/AR xx

• sales revenue xx

COGS. xx

• inventory. xx

describe the periodic system of iventory

• it is not a continuous method

• determines EI by physical count at end of the period

• for purchase, returns and discounts, it credits/debits temporary accounts and not inventory

  • these are then closed at end of year adjustment

record the journal entry for purchase of inventory with periodic system

• purchases XX

  • Cash/AP XX

record the journal entry for purchase returns with periodic system

• cash/AP XX

  • Purchase returns. XX

record the journal entry for sale of inventory with periodic system

• cash/AP XX

  • sales revenue XX

record the journal entry for purchase discounts

• cash/AP. XX

• purchase discounts XX

how do you calculate year end adjustment for period system?

1. assume we sell all BI

   • COGS XX

     • Inventory. XX (BI amount)

2. assume we sell all purchases, and close temp accounts

   • purchase discounts XX

   • Purchase returns. XX

   • COGS XX

     • Purchases. XX

     • Freight In. XX

3. physical count of EI

   1. correct entry: we didnt sell everything so adjust

      • inventory XX (Ei amount)

        • COGS XX

what is the net realizable value of inventory

estimated selling price - cost to sell

explain the lower of costs and NRV rule

• requires inventory to be recorded at the lower of historical cost and NRV

• if historical cost is lower, then no adjustment

• if NVR is lower, reduce inventory to match actual lower cost

  • COGS. XX

    • Inventory XX

what is inventory turnover

shows number of times a company sells its average inventory per period

COGS / Average inventory

what is average days in inventory

approx number of days inventory is held

365 / inventory turnover

what is the gross profit ratio

measures amount by which sales price of inventory exceeds its cost (per $ of sale)

GP/ Net sales