Chapter 7 | COGS & Inventory

What is Inventory?

Tangible property held for sale or used to produce goods/services for sale.

What is merchandise inventory?

Goods held for resalfe in the normal course of business.

What types of inventory do manufacturing firms have?

Raw materials, work in process, and finished goods.

What is COGS?

The cost of inventory that has been sold during a period.

Where is COGS reported?

Income statement.

Where is ending inventory reported?

Balance sheet.

What is a perpetual inventory system?

Record COGS every time a sale is made.

What is a periodic inventory system

Calculates COGS at the end of the period using a physical count.

Which system requires a physical count?

Periodic system

Why do we need costing methods?

Because inventory is purchased at different prices, so we must estimate which costs were sold.

What is specific identificaiton?

Tracks the exact cost of each individual item sold.

When is it used?

High-cost, unique items (cars, jewelry).

What is the average cost method?

uses the weighted average cost of all inventory

What does FIFO assume?

The first items ourchased are the first sold.

What does LIFO assume?

The most recent purchases are sold first.

In rising prices, which method gives the lowest COGS?

FIFO

In rising prices,which gives highest COGS?

LIFO

In rising prices, which gives highest ending inventory?

FIFO

In rising prices, which gives lowest inventory value?

LIFO

When does average cost fall?W

In between FIFO and LIFO

What is LCM?

Inventory must be reported at the lower of cost or market value.

When is inventory for LCM written down?

When market value is less than book value.

Where is the write-down for LCM recordrd?

COGS

What must companies disclose about inventory?

• Costing method used

• Must follow LCM

• Must be consistent over time

Why are inventory controls important?

• Prevent theft

• Prevent fraud

• Reduce errors

Examples of invenotry controls?

• Separate duties

• Secure storage

• Physical counts

• Perpetual tracking

What is inventory turnover?

How many times inentory is bought and sold in a period.

What does a high turnover mean?

Efficient sales and inventory management.

What might a low turnover indicate?

Low demand or too much inventory.

What does average days to sell measure?

How long it takes to sell inventory.

Is a lower number better or worse?

Better

Why do FIFO and LIFO give different results?

Because they assign different costs to COGS when price change.

What happens to net income when COGS increases?

Net income decreases.

What happens to taxes when COGS increases?

Tax decreases.