Accounting for Inventory and Cost of Goods Sold

TRUE

T/F: All merchandise firms including typical pharmacies have a greater investment in merchandise inventory (the goods to be sold) than in any other asset.

44%

According to NARD-Pfizer digest (2004) inventory accounts for about ____% of an independent community pharmacy's total assets

Cost of goods sold

_______________________ accounts for 75% of the operating expense of the typical independent community pharmacy

FALSE; Inventory also holds a comparable importance in the financial structure of hospital pharmacies.

T/F: Inventory does not hold a comparable importance in the financial structure of hospital pharmacies.

$100,000 and $499,999

According to a national survey conducted by the ASHSP, the inpatient pharmacy inventory value for a majority of hospital pharmacies ranged between $____________ and $__________

$500,000 to over $1 million

For hospitals with 400 or more beds average inventory values ranged $_________ to over $__________

FALSE; Because inventory and cost of goods sold are major factors in the financial operations of pharmacies, accounting for them accurately is important.

T/F: Accounting for the inventory and cost of goods sold is not important as it is not a major factor in the financial operations of pharmacies

(1) System used to measure inventory and costs of goods sold (Method of inventory measurement and costs of goods sold); (2) Method of evaluating/calculating these two values, when prices change over the accounting period

Two major issues affect accounting for inventory and cost of goods sold

Periodic systems; Perpetual systems

Two systems in measuring inventory and COGS

Perpetual System

A measurement system that maintains current and accurate accounts of inventory and COGS

TRUE

T/F: In perpetual system, the updating and recording of balances in the inventory and COGS account must be accomplished constantly

FALSE; Perpetual system equires that separate inventory accounts be kept for each stock-keeping unit (SKU)

T/F: In perpetual system, a separate inventory accounts is not needed for each stock-keeping unit (SKU)

stock-keeping unit (SKU)

An _______ is a unique size, strength, and type of item

6 different SKUs

How many SKU is needed for the following scenario? Valium is available in 2, 5, and 10 mg strengths and in 100 and 500 tablet package sizes

TRUE

T/F: For each SKU, the account shows the beginning inventory, all purchases and all sales of the item.

TRUE

T/F: In perpetual system, inventory account must be updated each time a purchase or sale has been made

TRUE

T/F: Perpetual system provides a complete sales history of each SKU

Periodic System

Historically been used by businesses (e.g. pharmacies, hardware stores, and supermarkets) that sell many different items, each of which has relatively low unit cost

FALSE; Periodic system is a simpler system than the perpetual system

T/F: Perpetual system is a simpler system than periodic system

accounts for sales, purchases, and inventory

Periodic system requires the recording of __________, ___________, and _________

COGS and individual SKUs

In periodic system, there are no accounts for ____________ and ___________

Purchase account

Merchandise purchases are recorded in the _________ account

FALSE; No adjustment is made to the inventory account for either sales or purchases.

T/F: in periodic system, adjustments are made to the inventory account for sales and purchases.

FALSE

T/F: in periodic system, records are updated frequently.

TRUE

T/F: in periodic system, the inventory account usually does not reflect the actual amount of inventory the firm holds

COGS=BI+P-EI, wherein BI - beginning inventory, P - total purchases, EI - ending inventory

Formula of cost of goods sold

Ending inventory

It is the amount of unsold inventory at the end of the year

cost of goods available for sale (COGAS) or the total value of merchandise that the pharmacy had available for sale for the year

What does the sum of the beginning inventory and total purchases represent?

EI

It is subtracted from the COGAS to determine the value of goods actually sold

TRUE

T/F: ending inventory in 2023 is used as the beginning inventory for 2024.

FALSE; COGS may only be accurately determined after physical inventory has been taken, which is usually done only ONCE A YEAR.

T/F: in periodic inventory, COGS can be determined even without physical inventory.

TRUE

T/F: Firms that use periodic system usually generate accurate financial statements only once a year

some products do not require frequent recording of inventory and COGS

Why is the periodic system used nowadays?

FALSE; Perpetual system

T/F: Periodic system is practical and widely used due to computerization.

Provides the COGS without a physical inventory; Provides information that managers can use to control inventory levels; Provides a basis for measuring shrinkage

Advantages of perpetual system (3)

FALSE; perpetual system. Periodic system: EI is needed to compute COGS and required physical inventory.

T/F: in periodic system, financial statements can be generated easily and inexpensively at any time during the year

Shrinkage

Refers to the amount of inventory that is lost, broken, or stolen (pilferage)

(1) inventory level recorded in the inventory account vs (2) that found by a physical inventory

What levels are compared to estimate shrinkage?

requires much record keeping, so it is easier when computerized

Major disadvantage of perpetual system

Weighted Average Cost Method; First In First Out / FIFO; Last In Last Out / LIFO

3 methods of costing inventory

units, unit cost, total cost (units * unit cost)

3 important values for inventory valuation

40=55-15

The goods available for sale is 55, and the EI is 15. What is the amount of goods sold?

Weighted Average Cost Method; First In First Out; Last In Last Out

Methods of costing inventory (3)

TRUE

T/F. Different values will be obtained in the three methods of costing inventory but the total cost of goods available for sale will be the same.

COGS = Beginning inventory + purchases - ending inventory

Formula for Cost of Goods Sold

COGAS = beginning inventory + purchases

Formula for Cost of Good Available for Sale (COGAS)

FIFO

What method is based on the assumption that the first units bought are the first sold?

LIFO

What method is is based on the assumption that the last unit bought are the first one sold and the first bought are the last sold?

lowest; highest

If prices are increasing over time, the FIFO will give the ____ cost of goods sold and LIFO will give the _____.

highest; lowest

If prices are decreasing over time, the FIFO will give the ______ cost of goods sold and LIFO will give the _____.

TRUE

T/F. If prices do not change (constant), all methods will give the same cost of goods sold.

FALSE; we inform the BIR/IRS because it will affect taxes.

T/F. We can switch from one method of costing inventory to another without the need to inform BIR/IRS.

WAC = COGAS/no. of items available for sale

Formula for Weighted Average Cost.

(a). WAC = 66.27; (b) COGS = 2,691; (c) EI = 1,009

Problem Solving: If my number of goods available for sale are 55, then i have an ending inventory of 10. Calculate the (a) weighted average cost, if the total cost of goods available for sale are 3,700. (b) cost of goods sold using the WAC, (c) and the ending inventory using WAC.

Statement I: If prices are increasing over time, the FIFO will give the lowest cost of goods sold and LIFO will give the highest.; Statement II: If prices are decreasing over time, the LIFO will give the highest cost of goods sold and FIFO will give the lowest.

Modified T/F: Statement I: If prices are increasing over time, the FIFO will give the lowest cost of goods sold and LIFO will give the highest. Statement II: If prices are decreasing over time, the LIFO will give the highest cost of goods sold and FIFO will give the lowest.

FALSE: It does not affect

T/F: The Inventory Valuation Method selected affects what the pharmacy paid for the merchandise it sold during the year

LIFO

This method minimizes tax payments and consequently maximize cash flow

No, except for their effects on income taxes

Y/N: Do Inventory Methods affect performance?

Cost

___ refers to the amount paid for the item when it is bought (GAAP principle)

Market value

___ refers to the replacement value of the item

Loss on write down of inventory

The difference between the calculated value of ending inventory and the value after the adjustment represents a loss of inventory for the pharmacy. This is also known as ____

FEFO/ First ended, first our OR first to expire, first out

Inventory management system that moves older products out first to prevent waste from products expiring before they are used

Purchases

___ refer to merchandise a pharmacy offers for resale to its customers

when you pay within 10 days of the date of sale when it is due 30 days, you can have a 2% discount of your purchase.

Explain the concept behind 2/10 net 30

Return of unsatisfactory goods; Shipping cost paid by the pharmacy to be treated as part of the cost of purchase

Other factors that affect the final value of purchases and cost of goods sold (2)

Statement I: FALSE, Pharmacies generally take cash discounts, thus purchases should be recorded at their discount prices.
Statement II: TRUE

Modified T/F:
Statement I: Pharmacies do not take cash discounts, therefore purchases are not recorded at their discount prices.
Statement II: If pharmacists fail to take the discount, the amount of the cost of the discount is recorded as an interest expense, not as part of the purchase price or cost of goods sold.

TRUE

T/F: You have to take into consideration the transportation cost and shipping cost in buying the merchandise

Unsatisfactory goods

Receiving ___ should also be considered because this will also have an effect on the cost of goods sold as a deduction.

COGS = Gross purchases at the discounted price + freight in cost minus purchase returns and allowances

Formula to calculate the cost of goods sold

Cost of goods sold

___ is an item or an account in the income statement.

Discount; Purchase of goods; Freight cost

Factors to consider when recording the cost of goods sold (3)

Purchase, returns, and allowances

Returns of merchandise to supplier should be deducted to the cost of goods sold as an account known as (3)

TRUE

T/F: Any purchase discount not taken would be considered as an interest expense and not part of purchases.

FALSE, they are different.

T/F: Transactions of pharmacies are not different from purely consulting pharmacy firms.

TRUE

T/F: Accounting for merchandise firms is more complicated than those with service firms

Purchases, freight-in, purchase discounts, purchase returns, and allowances, sales, sales discounts, sales returns and allowances and merchandise inventory

Accounts needed to facilitate recording and processing of merchandise (10)

FALSE, service firms have a simple income statement.

T/F: Service firms have a complicated income statement.

Cash discounts

___ is extended to patrons.

Purchase discounts

___ is another term for cash discounts

To encourage faster payments and thus improve cash positions; Reduce prices to increase sales

Reasons for having discounts (2)

30

Full payment is due withing ___ days.

FALSE, both the buyer and the seller should agree in advance who will pay the shipping cost.

T/F: It is always only the buyer who pays the shipping cost.

Free-on-board (F.O.B.)

Terms should be included on the invoice on a ___.

Free-on-board (F.O.B.) shipping point

___ means the seller is responsible only for loading the goods onto a truck, with the buyer bearing the freight cost from the shipping point to the destination.

Freight-in-costs

Transportation costs are ___ and are a part of the cost of goods sold.

Statement I: FALSE, the seller does bear the freight costs; Statement II: FALSE, the cost is part of the delivery expenses of the seller.

Modified T/F:
Statement I: The seller does not bear the freight costs necessary to deliver the goods to the buyer's place of business.
Statement II: The cost is not a part of the delivery expenses of the seller.

FALSE: Seller can avail of discounts in the form of returns and allowances

T/F: Seller can't avail of discounts

Defective and damaged

Sellers can avail of returns when goods are _____ and _____ in transit

Pharmacies

Suppliers receiving returned merchandise from

Patreons

Pharmacies receiving returned merchandise from

Credit or a refund

The merchandise is accepted for either ____ or a ____

Changed or paid

Goods returned are either ____ or ____ in cash

TRUE

T/F: Cogs is affected by purchases, sales, discounts, returns and allowances, etc.

Merchandising

Merchandise accounts enter into the determination of Net income, their balances appear in the income statement.

Debit Balances

Purchases, freight-in, sales discounts, and sales returns and allowances

Credit Balances

Purchase discounts, purchase returns, and allowances and sales

Selling Expenses

associated directly with the marketing and selling functions of a pharmacy.

FALSE: Seller can avail of discounts in the form of returns and allowances

T/F: Seller can't avail of discounts

Defective and damaged

Sellers can avail of returns when goods are _____ and _____ in transit

Pharmacies

Suppliers receiving returned merchandise from