Ch 6 Inventory and Cost of Goods Sold

Inventory includes items a company intends for sale to customers in the ordinary course of business (is a current asset and reported in the balance sheet) 

The cost of goods sold is reported in the income statement 

The cost of goods sold is an expense and is reported in the income statement representing the cost of goods sold 

gross profit- equals net revenues or net sales minus cost of goods sold

Operating income- equals gross profit minus operating expenses 

Income before income taxes- equals operating income plus nonoperating revenues and minus non-operating expenses 

Net income- equals all revenues minus all expenses 

Inventory cost methods 

• Specific identification- matches each unit of inventory with its actual cost 

• First in, first out(LIFO)- assumes units purchased are the first ones sold 

• Weighted- average cost- assumes each unit of inventory has a cost equal to the weighted average unit cost of all inventory items

Fifo method

• Matches the physical flow for most companies 

• ending inventory reflects the current cost 

• balance sheet approach 

Lifo method 

• The cost of goods sold reflects the current cost 

• Income statement approach 

Lifo conformity rule 

• Companies that use Lifo for tax reporting must also use Lifo for financial reporting 

perpetual inventory symptom- maintains a continual record of inventory on hand and inventory purchased and sold

Periodic inventory system- does not continually record inventory amounts, calculates the balance of inventory at the end of the period based on a physical count, adjusts for purchase and sales inventory 

Lifo adjustment- an adjustment used to convert a company's inventory records maintained throughout the year on a FIFO basis to a lifo basis for preparing financial statements at the end of the year 

Freight charges 

• Fob shipping point- means the title passes when the seller ships the inventory 

• Fob destination- means the title passes when the inventory reaches the buyer's destination 

Purchase discounts- discounts offered by the seller to the buyer for quick payment 

Purchase returns- buyer returns unwanted or defective inventory