Chp. 7: Inventory and Cost of Goods Sold

inventory

goods that are held for sale in the normal course of business or are used to produce other goods for sale

merchandise inventory

products acquired in a finished condition/ready for sale without further processing

Manufacturers often hold three types of inventory:

raw materials, work in process, and finished goods

Three types of manufacturing inventory: Examples of raw materials include:

plastic, steel, or fabrics

Three types of manufacturing inventory: When raw materials enter the production process, they become part of the _______ inventory, which includes goods that are in the process of being manufactured.

work in process

Three types of manufacturing inventory: Work in process inventory becomes _____.

finished goods inventory

Consignment inventory refers to goods:

a company is holding on behalf of the goods’ owner.

Consignment inventory typically arises when a company is willing to sell the goods for the owner (for a fee) but does not want:

to take ownership of the goods in the event the goods are difficult to sell.

Goods in transit are inventory items:

being transported.

Goods in transit are reported on the:

balance sheet of the owner, not the company transporting it.

If a sale is made FOB destination, goods in transit belong to the:

seller until they reach their destination (the customer).

If a sale is made FOB shipping point, goods in transit belong to:

the customer at the point of shipping (from the seller’s premises).

The primary goals of inventory managers are to:

maintain a sufficient quantity of inventory to meet customers’ needs, ensure inventory quality meets customers’ expectations and company standards, and minimize the cost of acquiring and carrying inventory.

One primary goal of an inventory manager is to minimize costs. This includes costs relating to:

purchasing, production, storage, spoilage, theft, obsolescence, and financing).

Because inventory will be used or converted into cash within one year, it is reported:

on the balance sheet as a current asset.

When a company sells goods, it removes their cost from the Inventory account (on the balance sheet) and:

reports the cost on the income statement as the expense Cost of Goods Sold.

Specific Identification Method

A method of assigning costs to inventory that identifies the cost of each specific item purchased and sold.

Companies tend to use the _____________ when accounting for individually expensive and unique items.

specific identification method

First-In, First-Out (FIFO) Method

Assumes that the first goods purchased (the first in) are the first goods sold.

Last-In, First-Out (LIFO) Method

Assumes that the most recently purchased units (the last in) are sold first.

Weighted Average Cost Method

Uses the weighted average unit cost of goods available for sale for calculations of both the cost of goods sold and ending inventory.

Although they’re called “inventory” costing methods, their names actually describe how to calculate the:

cost of goods sold

When using the FIFO method, the cost of the older goods are included in the CoGS when a sale is made while the costs of the newer goods are included in:

the cost of the ending inventory.

When faced with increasing costs per unit, a company that uses FIFO will:

have a higher income tax expense.

A change in CoGS calculation method is allowed only if it:

improves the accuracy of the company’s financial results.

CoGS is subtracted from Net Sales to yield the income statement subtotal called:

Gross Profit

CoGS is subtracted from _______ to yield the income statement subtotal called Gross Profit.

Net Sales

When costs are rising, FIFO produces a larger inventory value, making the:

balance sheet appear to be stronger.

When costs are rising, FIFO produces a larger gross profit, which makes the company look:

more profitable.

When costs are falling, FIFO produces a smaller ending inventory value and a:

larger cost of goods sold.

One reason why the value of inventory may fall below its recorded cost is because it is easily:

replaced by identical goods at a lower cost.

One reason why the value of inventory can fall below its recorded cost is because:

it has become outdated or damaged.

When inventory value falls below its cost, GAAP requires the inventory to be written down to its lower value. This rule is known as reporting inventory at the __________________.

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

The failure to follow inventory LCM/NRV rules is one of the most:

common types of financial statement misstatements.

inventory turnover

the process of buying and selling inventory

Inventory turnover ratio

CoGS / Average Inventory

A higher inventory turnover ratio means:

faster turnover.

The inventory turnover ratio is the:

number of times inventory turns over during the period.

Inventory days to sell equation

365 / inventory turnover ratio

A higher inventory days to sell value means:

a longer time to sell.

Often, the company with a lower gross profit percentage has a faster:

inventory turnover.