Inventory and Merchandising Operations

Comprehensive vocabulary flashcards covering inventory definitions, merchandising operations, costing methods (FIFO, LIFO, Weighted Average), shipping terms, and inventory estimation formulas.

Inventory

Products a company plans to sell that are classified as assets because they have value and generate future cash.

Service Company

A business that provides services rather than products, usually has no inventory, and lists salaries as its main expense.

Merchandising Company

A business that buys products and resells them, such as Zara or Amazon, and lists Cost of Goods Sold (COGS) as its main expense.

Cost of Goods Sold (COGS)

The cost of the inventory that was sold to customers; it is categorized as an expense after delivery.

Gross Profit Formula

$$\text{Gross Profit} = \text{Sales} - \text{COGS}$$

Inventory Flow Rule

Inventory is recorded as an asset before the sale and becomes an expense (COGS) after the sale.

Cost of Goods Available for Sale Formula

$$\text{Beginning Inventory} + \text{Purchases} = \text{Cost of Goods Available for Sale}$$

Ending Inventory Formula

$$\text{Ending Inventory} = \text{Beginning Inventory} + \text{Purchases} - \text{COGS}$$

Included Inventory Costs

Costs that are added to the inventory asset, including purchase price, import taxes, freight-in, transportation, and costs to get goods ready for sale.

Excluded Inventory Costs

Costs treated as immediate expenses rather than inventory assets, such as advertising, sales commissions, and delivery to customers.

FOB Shipping Point

A shipping term where ownership transfers when goods leave the seller; the buyer owns the inventory during transport and pays transport costs.

FOB Destination

A shipping term where ownership transfers when goods arrive; the seller owns the inventory during transport and pays transport costs.

Periodic System

An inventory system updated only occasionally (usually at year-end) via a physical count; it is simpler but less accurate than other systems.

Perpetual System

An inventory system updated continuously where every purchase and sale is recorded immediately; used by modern businesses like Carrefour and Uniqlo.

2/10, n/30

Settlement terms meaning a $2\%$ discount is applied if paid within $10$ days; otherwise, the full amount is due within $30$ days.

Specific Identification

An inventory costing method used for unique items like cars, houses, or art where the exact cost of each specific item sold is known.

FIFO (First In First Out)

A costing method assuming the oldest inventory is sold first; when prices rise, it results in the lowest COGS and highest profit.

LIFO (Last In First Out)

A costing method assuming the newest inventory is sold first; prohibited by IFRS, it results in the highest COGS and lowest profit when prices rise.

Weighted Average Method

An inventory costing method that averages all inventory costs, placing its financial effects in the middle of FIFO and LIFO.

Net Realizable Value (NRV) Formula

$$\text{NRV} = \text{Estimated Selling Price} - \text{Costs to Sell}$$

Lower of Cost or NRV Rule

An IFRS rule stating inventory must be reported at whichever value is lower: its original cost or its Net Realizable Value.

Overstated Inventory Effects

When inventory is reported too high, COGS is decreased and Profit and Assets are increased.

Understated Inventory Effects

When inventory is reported too low, COGS is increased and Profit and Assets are decreased.

Crazy Eddie

A famous example of inventory fraud where the company used fake inventory counts to overstate profits before collapsing.

Gross Profit Method

A technique used to estimate ending inventory when records are missing due to events like fire, flood, or theft.