Inventory and Merchandising Operations

Practice flashcards covering definitions, formulas, and comparisons from the Inventory and Merchandising Operations lecture note.

Inventory

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

Service Company

A business that provides services (e.g., Netflix, Uber) and usually has no inventory, with salaries as the main expense.

Merchandising Company

A business that buys products and resells them (e.g., Zara, Amazon) and features Cost of Goods Sold (COGS) as its main expense.

Cost of Goods Sold (COGS)

The cost of the inventory that was sold during a period.

Gross Profit Formula

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

Inventory Stage 1: Purchase

The stage where a company buys goods, causing inventory to increase and be recorded as an asset.

Inventory Stage 2: Sale

The stage where goods are sold, inventory decreases, and the cost becomes an expense called COGS.

Delivery Constraint for COGS

The rule that inventory becomes COGS when goods are delivered and the customer receives control.

Cost of Goods Available for Sale Formula

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

Ending Inventory (Standard Formula)

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

Included Inventory Costs

Costs such as purchase price, import taxes, freight-in, transportation, and costs to get goods ready for sale.

Excluded Inventory Costs

Costs that are expensed immediately, such as advertising, sales commissions, and delivery to customers.

FOB Shipping Point

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

FOB Destination

A shipping term meaning ownership transfers when goods arrive at the buyer; the seller owns them during transport and pays transport costs.

Periodic System

An inventory system updated only occasionally, typically at year-end with a physical count; it is simple but less accurate.

Perpetual System

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

Settlement Discounts (e.g., 2/10, n/30)

Terms providing a $2\%$ discount 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, and art where every item sold is tracked individually.

FIFO (First In First Out)

An inventory costing method assuming that the oldest inventory is sold first.

LIFO (Last In First Out)

An inventory costing method assuming the newest inventory is sold first; this method is not allowed by IFRS.

Weighted Average

An inventory costing method where the cost of every unit sold is determined by averaging the total costs of all units available.

FIFO Effects (Prices Rising)

When prices rise, this method results in the lowest COGS, the highest Gross Profit, and the highest Ending Inventory.

LIFO Effects (Prices Rising)

When prices rise, this method results in the highest COGS, the lowest Gross Profit, and the lowest Ending Inventory.

Net Realizable Value (NRV) Formula

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

Lower of Cost or NRV Rule

The IFRS requirement that inventory must be reported at either its cost or its NRV, whichever is lower.

Overstated Inventory Effects

Reporting inventory too high results in COGS being understated, while profit and assets are overstated.

Inventory Fraud

The intentional manipulation of records, such as the Crazy Eddie case involving fake counts, to make profits look larger.

Gross Profit Method

A method to estimate ending inventory when records are missing due to fire, flood, or theft, calculated by subtracting COGS from total goods available.