Inventory Basics

A set made from studying resources for FBLA Accounting 1 competition.

How does merchandise inventory affect a business?

A business may fail if too much or too little merchandise inventory is kept on hand

What helps business managers make effective business decisions?

Cost of Merchandise Inventory

What is continually being bought/sold on a daily basis?

Merchandise

What is the equation for calculating Cost of Merchandise Available for Sale?

Beginning Merchandise Inventory + Net Purchases

What is the equation for calculating Cost of Merchandise Sold?

Cost of Merchandise Available for Sale - Ending Merchandise Inventory

What does Cost of Merchandise Sold represent?

Merchandise sold during the current fiscal period

What is the Income Statement, Statement of Stockholders' Equity, and Balance Sheet directly affected by?

Cost of beginning and ending merchandise

If ending inventory is understated, then:

Cost of Merchandise Sold is overstated
Gross Profit is understated
Net Income is understated
Retained Earnings is understated
Stockholders' Equity is understated
Merchandise Inventory is understated
Total Assets is understated

If ending inventory is overstated, then:

Cost of Merchandise Sold is understated
Gross Profit is overstated
Net Income is overstated
Retained Earnings is overstated
Stockholders' Equity is overstated
Merchandise Inventory is overstated
Total Assets is overstated

If Gross Profit is understated at the end of a fiscal period, then:

Ending inventory for the fiscal period is understated

If Total Assets are overstated at the end of a fiscal period, then:

Ending inventory for the fiscal period is overstated

Cost of Merchandise sold is overstated when:

Ending inventory is understated

Cost of Merchandise sold is understated when:

Ending inventory is overstated

What two things affect the cost of inventory amounts?

1. Price paid to vendors for merchandise
2. Costs involved in transporting and preparing merchandise

How is the price paid to vendors for merchandise determined?

Purchase Amount - Purchase Discounts - Returns & Allowances

What is an example of something that would be included with the purchase price for calculating the cost of inventory?

Shipping

What are goods?

Items in the Merchandise Inventory

What are the two ways the number of inventory goods can be found?

1. Physical Count
2. Continuous Record

What is the name of the inventory system that involves physical counts?

Periodic Inventory

What is the name of the inventory system that updates with every transaction?

Perpetual Inventory

Counting the number of cows at a farm would be an example of:

Determining number of goods with Periodic Inventory

An online system automatically decreasing the quantity of Hi-Chew bags in merchandise inventory by one when a bag is sold would be an example of:

Determining number of goods with Perpetual Inventory

What does the FOB abbreviation stand for?

Free on Board

What are the two variations of FOB?

1. FOB Shipping Point
2. FOB Destination

Which variation of FOB has the buyer paying transportation charges?

FOB Shipping Point

What variation of FOB has the vendor paying transportation charges?

FOB Destination

When does the title to the goods transfer with FOB Shipping Point?

Title passes to buyer as soon as vendor delivers goods to a transportation service

When does the title to the goods transfer with FOB Destination?

Title passes to buyer as soon as vendor delivers goods to them

What are Goods on Consignment?

Goods given to a business to sell

Who has the title to the goods when consignment is utilized?

The title remains to the vendor in most cases

Who is the Consignee?

The business that receives/sells goods on Consignment

Who is the Consignor?

The business that provides goods on Consignment to sellers

PepsiCo, Inc. is an example of a:

Consignor

Walmart Inc. is an example of a:

Consignee

What does the Perpetual Inventory system do?

Provides a daily record of merchandise inventory increases, decreases, and balance on hand

What is a Stock Record?

A form that shows type of merchandise, quantity received, quantity sold, and balance on hand

If a Stock Record indicates a good currently has a quantity of 299, but has a reorder quantity of 1,000 and a minimum quantity of 300, then:

1,000 of the good would be automatically ordered

If a Stock Record indicates a good currently has a quantity of 147, but has a reorder quantity of 50 and a minimum quantity of 100, then:

Nothing would be ordered as the minimum quantity is not met

Which type of documentation record does Perpetual Inventory use?

Stock Record

Which type of documentation record does Periodic Inventory use?

Inventory Record

Why is an annual physical count important in addition to Perpetual Inventory?

To verify the accuracy of the Perpetual Inventory system

How is Merchandise Inventory found with the Periodic Inventory system?

Counting, weighing, or measuring goods of merchandise on hand ("taking an inventory") are the various methods utilized

At a minimum, how often should a periodic inventory be taken?

Annually

What is a Inventory Record?

A form used to record information about each item of merchandise on hand

The correct order to fill out an Inventory Record is to:

1. Enter inventory date/item description
2. Record stock no./descriptions
3. Write number of units on hand
4. Record the unit price
5. Calculate and record total item cost
6. Total the total cost column

The incorrect order to fill out an Inventory Record is to:

1. Enter inventory date/item description
2. Record purchase invoice no./descriptions
3. Write number of units on hand
4. Record the total unit price for each item
5. Calculate and record total item cost
6. Total the number of units and unit prices

If an Inventory Record indicates that there are 670 units of a good on hand at a unit price of $4.70, then:

The total cost of the goods would be $3,149.00

If an Inventory Record indicates that there are 40 units of a good on hand at a unit price of $7.65, then:

The total cost of the goods would be $306.00

What is required for the Periodic Inventory system to work?

A dollar cost for each item that is calculated using different methods

How does a business decide how to find their Cost of Merchandise Inventory?

A business chooses the method that best matches revenues and costs during fiscal period

What does FIFO stand for?

First In, First Out

What does LIFO stand for?

Last In, First Out

What does the FIFO method of inventory costing assume?

Merchandise purchased first is the merchandise sold first

What is the correct order to calculate inventory cost using FIFO?

1. Assign units from most recent purchase
2. Assign units from next most recent purchase
3. Multiply ending inventory units by unit price
4. Total the ending inventory columns

What is the correct order to calculate inventory cost using LIFO?

1. Assign units from earliest purchase
2. Assign units from next earliest purchase
3. Multiply ending inventory units by unit price
4. Total the ending inventory columns

What does the LIFO method of inventory costing assume?

Merchandise purchased last is the merchandise sold first

A business has 700 units of ice cream available at the end of the fiscal period. The business had purchased 500 units at $1.20 in June and 500 units in November at $1.25. The beginning ice cream inventory was 500 units at $1.00.

Use FIFO inventory costing to calculate total inventory costs for January, June, and November.

January = $0.00
June = $240.00
November = $625.00
Totals = $865.00

A business has 950 units of tables available at the end of the fiscal period. The business had purchased 500 units at $1.10 in June and 500 units in November at $1.30. The beginning table inventory was 500 units at $1.00.

Use FIFO inventory costing to calculate total inventory costs for January, June, and November.

January = $0.00
June = $495.00
November = $650.00
Totals = $1,145.00

A business has 1,453 units of chairs available at the end of the fiscal period. The business had purchased 500 units at $1.10 in June and 500 units in November at $1.60. The beginning chair inventory was 500 units at $1.00.

Use FIFO inventory costing to calculate total inventory costs for January, June, and November.

January = $453.00
June = $550.00
November = $800.00
Totals = $1,803.00

A business has 700 units of ice cream available at the end of the fiscal period. The business had purchased 500 units at $1.20 in June and 500 units in November at $1.25. The beginning ice cream inventory was 500 units at $1.00.

Use LIFO inventory costing to calculate total inventory costs for January, June, and November.

January = $500.00
June = $240.00
November = $0.00
Totals = $740.00

A business has 950 units of tables available at the end of the fiscal period. The business had purchased 500 units at $1.10 in June and 500 units in November at $1.30. The beginning table inventory was 500 units at $1.00.

Use LIFO inventory costing to calculate total inventory costs for January, June, and November.

January = $500.00
June = $495.00
November = $0.00
Totals = $995.00

A business has 1,453 units of chairs available at the end of the fiscal period. The business had purchased 500 units at $1.10 in June and 500 units in November at $1.60. The beginning chair inventory was 500 units at $1.00.

Use LIFO inventory costing to calculate total inventory costs for January, June, and November.

January = $500.00
June = $550.00
November = $724.80
Totals = $1,774.80

What does the Weighted Average method of inventory costing assume?

Cost is an average of the price paid for similar goods purchased during fiscal period

How is the Weighted Average calculated?

Average Cost of Beginning Inventory + Merchandise purchased during fiscal period

How is the Weighted Average Price per Unit calculated?

Total of Beginning Inventory and Purchases/Total Units

How is the Ending Inventory found with the Weighted Average Price per Unit?

Units in Ending Inventory x Weighted-Average Price per Unit

The Weighted Average method is used by a business for their pens. A recorded quantity of 500 pens at $1.20 in June and an additional 500 pens in November at $1.25 were purchased by the business. The inventory at the beginning of the year was 500 units at $1.00.

If there are 700 units at the end of the fiscal period, then what is the final cost of the pens in inventory?

$805.00

The Weighted Average method is used by a business for their beds. A recorded quantity of 500 beds at $1.30 in June and an additional 500 beds in November at $1.60 were purchased by the business. The inventory at the beginning of the year was 500 units at $1.00.

If there are 800 units at the end of the fiscal period, then what is the final inventory value of their beds?

$1,040.00

The Weighted Average method is used by a business for their cats. A recorded quantity of 10 cats at $120.00 in June and an additional 15 cats in November at $115.00 were purchased by the business. The inventory at the beginning of the year was 30 cats at $127.00.

If there are 10 units at the end of the fiscal period, then what is the final inventory value of their cats?

$1,224.50

What is a direct cause of cost of merchandise sold being higher?

Higher ending inventory costs

What is a direct cause of the cost of merchandise sold being lower?

Lower ending inventory costs

What leads to high net income?

Lower Cost of Merchandise Sold

What leads to low net income?

Higher Cost of Merchandise Sold

How does the FIFO inventory costing method affect ending inventory during rising prices?

Results in the highest ending inventory valuation

How does the LIFO inventory costing method affect ending inventory during rising prices?

Results in the lowest ending inventory valuation

What is true about Weighted Average ending inventory costs during periods of both rising prices and decreasing prices?

Always falls between the FIFO and LIFO results

What costing method should a business that purchases items with huge fluctuations in price?

Weighted Average

How long should a costing method be used by a business?

A number of years to ensure consistent reporting

What does market mean?

The current replacement cost of a merchandise item

What two things are required for the Lower of Cost or Market method of costing to be correct?

1. FIFO, LIFO, or Weighted Average cost of inventory
2. Current price in market

What dollar amount (costing method or market price) is used in the Lower of Cost or Market method to cost ending inventory?

The lower of the two amounts

What are the work steps for the Lower of Cost or Market method?

1. Calculate the cost (FIFO, LIFO, etc.)
2. Calculate the current market price
3. Determine the smaller amount of the two
4. Record the lower end inventory cost

If the unit price is lower than market price, then what happens?

The inventory cost says the same

If the unit price is higher than market price, then what happens?

The inventory cost is reduced to the current market price

When can monthly inventory cost of merchandise be estimated?

During monthly interim financial periods

Why can the monthly ending inventory costs be estimated?

Monthly periodic inventories are not feasible

Which method of estimating the ending inventory is done by using the previous years' percentage of gross profit on operations done?

Gross Profit

Which method of estimating the end inventory uses a percentage based on the cost and retail prices with separate records?

Retail

What are the steps to the Gross Profit Method of Estimating the Cost of Merchandise Inventory?

1. Write beginning inventory amount
2. Determine net purchases
3. Calculate merchandise available for sale
4. Enter net sales
5. Estimate gross profit
6. Calculate estimated cost of merchandise sold
7. Determine estimated ending inventory

What are the steps to the Retail Method of Estimating the End Cost of Merchandise Inventory?

1. Enter beginning inventory at cost and retail
2. Add net purchases at cost and retail
3. Calculate merchandise available for sale at cost/retail
4. Write net sales
5. Calculate estimated ending inventory at retail
6. Determine estimated ending inventory cost