ACC 304 Module 2 Chapter 8- Cost inventory

Inventory is not the same as ____

Capital Assets or Supplies

Merchandising is usually just ___ account

one

Flow of inventory and cost for a manufacturing company

Raw materials, direct labor. MO → WIP → Finished Goods

Items to include in inventory

• Purchases of physical goods (purchases recorded when legal title passes to buyer)

  • Items in the possession of the company

  • Goods in transit: FOB Shipping vs FOB Destination

  • Consigned goods: consignor = owner of goods

• CoFactor in anticipated Sales Returns

Cost of inventory includes necessary effors to

1. Accquire inventory

2. Bring it to its desired condition and location for sale or for use in the manufacturing process

What reducdes the the cost of net purchases

Purchase returns and purchase discounts

How to calculate Net Purchases

Total purchases + freight and other costs - returns and discounts

Perpetual inventory

• Constantly adjusting inventory and COGS account after any change like a purchase or a sale

Characteristics of a perpetual system

• Purchases of merchandise are debited to

Inventory

• Freight-in, purchase returns and allowances, and purchase discounts are recorded in Inventory.

• Cost of goods sold is debited and inventory is

credited for each sale.

• Physical count is done to verify inventory

balance.

• Record into Inventory Over and Short account

  (Income Statement account

Periodic inventory system

• Adjusts the inventory account and records cost of goods

sold only at the end of each reporting period

• Records merchandise purchases, purchase returns,

purchase discounts, and freight-in in temporary

accounts

• Determines period’s cost of goods sold by combining

temporary accounts with the inventory account:

COGS = Beg. Inventory + Net Purchases - EI

Characteristics of the periodic inventory system

• Purchases of merchandise are debited to

purchases account.

• Ending inventory determined by physical count.

PERPETUAL JE for Purchasing units

Dr. Inventory

CR. AP

PERIODIC JE for Purchasing units

Dr. Purchases

Cr. A/P

PERPETUAL JE for sale

Dr. A/R

Cr. Sales

DR. COGS

CR. Inventory

PERIODIC JE for sale

Dr. A/R

Cr. Sales

PERPETUAL AJE

none

PERIODIC AJE

Dr. Inventory (End)

Dr.. COGS

Cr. Purchases

Cr. Inventory (B)

How to calculate COGS / check inventory

Beginning Inventory (BI)

+ Purchases (P)

- Purchase Returns and Allowances

- Purchase Discounts

+ Freight

=Goods Available for Sale (GA4S)

- Ending Inventory (EI)

=Cost of Goods Sold (COGS)

Advantages of FIFO

Often matches true physical flow

• Easy to calculate

• Same results regardless of the company using

perpetual or periodic methods

• Ending inventory is closer to actual

• More accurate balance sheet

Disadvantages of FIFO

Income Statement matching problem

• Current sales revenue are matched with old costs.

Advantages of LIFO

Matching more recent costs to current revenues

Tax benefits and improved cash flow

• COGS higher, net income lower, so taxes are reduced

Cons of lifo

• Reduces earnings

• Inventory understated

• Doesn’t usually match physical flow of goods

• Liquidation impact

• Inefficient buying habits

Dollar Value LIFO

Changes in a LIFO pool of goods are measured in terms of
total dollar value, not physical quantity.

Dollar value lifo - use cost indeces

To deflate inventory amounts by any increase in prices so that both the beginning and ending amounts are measured in terms of the same price level

Advantages of dollar value lifo

• Broader range of goods in pool

• permits replacement of goods that are similar

• Helps protect LIO layers from erosion (Lifo liquidation)

Steps for dollar value lifo

1. Year’s inventory / price index = base year price

2. year - prior year = ± change

3. Adjust change

   1. positive change x price index

   2. negative change: remove previous layers to compensate for loss