Chapter 7: Inventory and Cost of Goods Sold

Merchandise inventory

________ consists of products that are already made. Merchandisers then sell these finished goods to their customers.

Raw materials
Work in Process
Finished Goods

Manufacturers have three types of inventory:

Raw materials

________ are materials that are waiting to be processed, such as plastic, steel, and fabric. ________ are used to create the goods that are in the process of being manufactured, which results in the completed products.

Work in Process

________ goods are not up for sale yet, but are in the process of getting to that stage.

Finished

________ goods are the inventory that are completed and ready to be sold to customers.

Consignment inventory

________ are any products being held by a company so they do not claim ownership over the owners' product. In the case the inventory is difficult to sell, the ownership is not under them.

Goods in transit

________ are goods being transported to the location of the buyer, whether this is someones front door or a store getting ready to sell those items (Walmart).

What inventory managers must do

Ensure inventory count is meeting demand, the quality is satisfactory, and minimize costs of acquiring, transporting, and storing inventory.

current asset

Inventory is reported on the Balance Sheet as a ________ because it will be sold to generate cash within a year.

Cost of Goods Sold expense

When inventory is sold, the cost moves from the Inventory account (balance sheet) and becomes ________ (income statement).

\

Equation to calculate Gross Profit

Periodic Updating

________ is used for small businesses (mom and pop shops). It uses the Cost of Goods Sold equation.

\

Cost of Goods Sold =

Perpetual Updating

________ is used for bigger companies (Walmart). IT uses the Ending Inventory equation.

\

Equation to calculate Ending Inventory

four inventory costing methods

The ________ tell us the value of what was sold and what should be sitting in Cost of Goods expense. They are all accepted by the GAAP.

Specific identification

________ individually identifies and records the cost of each item sold as Cost of Goods Sold. The cost of each item must be tracked.

luxury items (cars, jewelry)

The specific identification method is best used for _________.

Cost Flows Assumptions

The last three methods are not based on physical flow of goods, but based on ________, which are assumptions accountants make about the flow of inventory costs.

First in, first out (FIFO)

________ says that inventory goes out (is sold) in the order the goods are received.

Last in, first out (LIFO)

________ says the last goods received are the first to be sold.

Weighted average

________ says that the average for Cost of Goods Available for Sale is used for each good sold and for the goods that are still in inventory.

Cost of Goods Available for Sale/Number of Units Available for Sale

Equation to calculate Cost per unit

Number of units x Cost per units

Equation to calculate total cost

Cost of Goods Sold

Cost that goes into Inventory will not go into ________.

highest

The method that results in the ________ cost in Inventory will have the lowest cost in Cost of Goods Sold.

lowest

The method that results in the highest cost in Cost of Goods Sold will have the ________ cost in Inventory.

rising costs

A company will have larger inventory and smaller cost of goods because of ________.

falling costs

A company will have smaller inventory and larger cost of goods because of ________.

lower income tax

Using a method that results in lower inventory and higher cost of goods sold is beneficial because of _______.

financial results

A company may only switch from one method to another if it improves the accuracy of the company's ________.

LIFO conformity rule

The ________ says the method used for the companys income tax return must also be used for the financial statement.

It is replaced by similar goods and a lower cost.
The goods are outdated or damaged

The value of inventory may be lower than the cost of the inventory because.....

lower cost or market (LCM)/net realizable value (NRV)

As required by the GAAP, there is a rule for reporting inventory at the ________.

fallen below

If the inventory value has ________ its cost, it must be marked down to the lower value.

Market value

________ is a replacement cost.

Net realizable value

________ is the inventory value to be realized when sold.

Inventory turnover

________ is the cycle of an increasing balance when a company buys goods and a decreasing balance when a company sells goods.

inventory turnover analysis

To evaluate change in inventory, we use ________. An inventory turnover ratio shows how many times inventory is bought and sold.

bought and sold quickly

A higher inventory turnover rate indicates inventory is ________.

\

Equation to calculate Inventory Turnover Ratio
The higher the ratio, the better.

"Days to Sell"

________ focuses on the length of time it takes to sell inventory.

\

Equation to calculate Days to Sell:

longer amount of time taken to sell goods

A higher number for "days to sell" represents a(n) ________.