ACCT chapter 7

What is inventory?

Inventory is tangible property that is held for sale in the normal course of business or used to produce goods or services for sale.

What are the categories of inventory?

Raw Materials Inventory, Work in Process Inventory, Finished Goods Inventory, Merchandise Inventory.

What happens to inventory before and after it is sold?

Before it’s sold, it is an asset on the balance sheet; when it’s sold, it becomes an expense (COGS) on the income statement.

What are Product Costs?

Costs that are capitalized as inventory and then expensed as COGS when sold.

What are Period Costs?

Costs that are expensed on the income statement when incurred, such as selling, general, and administrative expenses.

What does FIFO stand for?

First In, First Out, which assumes that the first inventory items purchased are the first to be sold.

What is LIFO?

Last In, First Out, which assumes that the last inventory items purchased are the first to be sold.

What is the Average Cost Method?

A method where the average cost of goods available for sale is assigned to inventory and COGS.

What is the significance of Cutoffs in inventory accounting?

Cutoffs determine which physical goods are included in inventory and relate to satisfying performance obligations for revenue recognition.

What journal entry is required for a write-down of inventory?

COGS is debited and Inventory is credited to reflect the write-down to net realizable value.

How are costs included in inventory acquisition?

Costs such as invoice price, freight-in, inspection costs, and preparation costs are included in inventory acquisition cost.

What is the net realizable value?

The expected sales price minus expected selling costs.

How does the perpetual inventory system differ from the periodic inventory system?

In a perpetual system, the inventory account is continuously updated; in a periodic system, the inventory is counted and COGS is calculated at the end of the period.

Why do companies adjust inventory methods for internal reporting?

To provide more detailed COGS and inventory information for decision-making and potentially optimize tax reporting.

What factors can affect the calculation of COGS?

Variations in inventory costs, losses, damages, and any inventory consumed by the owner can affect COGS.

What methods can companies use to value inventory according to US GAAP?

FIFO, LIFO, Average Cost, and Specific Identification.

What is the calculation for COGS using the average cost method?

COGS = Total cost of goods available for sale - Ending inventory.

How is Ending Inventory calculated under FIFO?

By using the cost of the most recent purchases for the remaining inventory.

How does LIFO affect COGS during inflation?

LIFO typically results in higher COGS during periods of rising prices, decreasing taxable income.

What are some key inventory controls mentioned in the notes?

Separation of responsibilities, protecting inventory from theft or damage, limiting access, and maintaining detailed records.