Intermediate final exam

2026 spring

Merchandise inventory

Goods purchased by retailers and wholesalers to resell to customers without any additional manufacturing.

What are the three types of inventory reported by manufacturing firms?

1. Raw materials inventory: Inputs that have not yet been placed into production.

2. Work-in-process inventory: Goods currently in the manufacturing process (including raw materials, cost of labor, and allocated overhead costs).

3. Finished goods inventory: Goods for which the manufacturing process is complete.

Goods included in inventory (goods in transit)

Ending inventory typically consists of goods in physical possession plus goods in transit (items that have left the seller but not yet been received by the buyer).

• F.O.B. shipping point: Title passes when goods are shipped. Buyer reports goods in inventory while in transit (belongs to buyer)

• F.O.B. destination: Title passes when goods are received. Seller reports goods in inventory while in transit (belongs to seller)

consignment

When a company (the consignor) sends goods to a consignment seller (the consignee), the goods are still owned by the consignor until the consignee sells them to a final customer.

Freight-in costs

Transportation costs incurred to bring inventory to the buyer(the company/wholesaler that is purchasing goods from manufacturer)

ex) packaging and handling costs

• f.o.b shipping point - buyer(company) pays for shipping, buyer has freight-in

• f.o.b destination - seller(manufacturer of raw materials) pays for shipping, buyer has no freight-in

Key Rule: Freight-out is capitalized as part of inventory cost.

freight-out costs

Transportation costs incurred to ship goods to customers (expensed immediately as Delivery Expense).

ex) UPS/FedEx shipping fees

• F.O.B. Destination → seller(company) pays for shipping → seller records freight-out

• F.O.B. Shipping Point → buyer(customer) pays for shipping → seller has no freight-out cost

Key Rule: Freight-out is never capitalized — it is always expensed immediately.

capitalized

Recording a cost as an ASSET on the balance sheet, instead of immediately recording it as an EXPENSE on the income statement.

when u buy inventory and pay freight-in what happens …. and when u sell that inventory what happens….

1st. inventory increases

2nd. inventory decreases, cogs increases, and net income decreases

purchase discounts

reduction in amount due if buyer pays early (e.g., 2/10, n/30).

Explain purchase discounts and the two methods to record them.

Purchase discounts = reduction in amount due if buyer pays early (e.g., 2/10, n/30).

Gross method:

• Record A/P at full invoice amount initially.

• If discount taken, record purchase discount later. (adjusts inventory for discount taken)

• reduces inventory

Net method:

• Record A/P at net discounted amount (full price minus discount) initially!!

• Assumes discount will be taken. so already recorded

• records interest expense for discounts lost

Both methods are acceptable under GAAP.

Judgments in accounting: Inventory costs (general idea)

Deciding what costs to include in inventory is often subjective.

What judgments are required in accounting for inventory costs?

for freight costs……

Determining what is "normal" vs. "abnormal" freight.

How are normal vs abnormal freight-in costs treated?

normal - Capitalized as part of inventory cost.

abnormal - Expensed (not capitalized in inventory).

How does the choice of gross vs. net method affect financial statements?

It impacts the balance in the inventory account.

Under the gross method vs net method, inventory is initially recorded at what amount?

gross method - Full (gross) invoice amount.

net method - Net amount (gross minus expected discount).

"Under the net method, what happens if the discount is NOT taken?"

Answer: Debit Interest Expense for the discount lost.

perpetual vs periodic

perpetual - keep track of cogs everytime u make a sale

periodic - A system where a company determines the inventory balance and cost of goods sold at the end of the accounting period (not continuously).

Under a perpetual system, what happens if the physical inventory count is less than the book balance?

The company records a loss (or shrinkage) to adjust inventory down to the actual count.

Under a periodic system, when is COGS computed?

At the end of the accounting period only.

What are the components of Cost of Goods Sold under a perpetual vs periodic system?

perpetual - Beginning Inventory + Net Purchases − COGS = Ending Inventory

periodic - Beginning Inventory + Net Purchases − Ending Inventory = COGS