Chapter 6: Inventory Management and Costing Methods

Control over Inventory

Ensures safeguarding and accurate reporting of inventory.

Inventory Cost Flow Assumptions

Methods determining inventory cost for financial statements.

Perpetual Inventory System

Continuous tracking of inventory levels and costs.

FIFO

First units purchased are sold first. (First in-First out)

LIFO

Last units purchased are sold first. (Last in-First out)

Weighted Average Cost

Average cost of inventory based on purchase costs.

Specific Identification Method

Tracks individual items for cost assignment. (ex. car dealer)

Purchase Order

Document authorizing inventory purchase from vendor.

Receiving Report

Initial record confirming inventory receipt.

Vendor's Invoice

Bill detailing items purchased from vendor.

Physical Inventory Count

Actual count of inventory for accuracy.

Gross Profit

Revenue minus cost of goods sold.

Ending Inventory Value

Value of unsold inventory at period end.

Cost of Goods Sold (COGS)

Total cost of inventory sold during a period.

Net Realizable Value

Estimated selling price minus disposal costs.

Direct Costs of Disposal

Expenses related to selling inventory.

Physical Flow of Goods

Actual movement of inventory through a business.

Cost of Goods Available for Sale

Total cost of inventory ready for sale.

Sales Commissions

Fees paid to sales agents for selling.

Special Advertising Costs

Expenses for promoting inventory sales.

Replacement Cost

Cost to replace inventory items.

Lower of Cost or Market (LCM)

Valuation method comparing cost and market value. If cost is less than market, cost is used. If market is less than cost, NRV is used.

Market Value

Current selling price of inventory item.

Inventory Valuation Methods

Methods include FIFO, LIFO, weighted average.

Physical Inventory Errors

Mistakes in counting actual inventory on hand.

FOB Shipping Point

Title passes to buyer when goods are shipped.

FOB Destination

Title passes to buyer when goods are received.

Consigned Inventory

Inventory held by a retailer but owned by manufacturer.

Consignor

Manufacturer who retains title until goods are sold. (ex,

GMC may own the trucks on a dealer's car lot)

Consignee

Retailer acting as selling agent for consignor.

Balance Sheet Reporting

Inventory listed under current assets on balance sheet.