Chapter 6: Reporting and Analyzing Inventory and COGS

Types of Inventories: Understand inventories held by both merchandisers and manufacturers and how these costs flow through a company.
Inventory Transactions: Record purchases and sales of inventory using a perpetual inventory system.
Inventory Costing Methods: Apply three inventory costing methods (Specific Identification, FIFO, Weighted Average Cost) to compute ending inventory and cost of goods sold.
Financial Reporting Effects: Analyze the financial reporting and tax implications of different inventory costing methods.
Lower of Cost and Net Realizable Value: Apply the LCM rule for inventory valuation.
Inventory Management: Evaluate inventory management using gross profit and inventory turnover ratios.
Errors in Inventory: Understand how errors in ending inventory affect financial statements.
Periodic Inventory System: Record purchases using a periodic inventory system and compute ending inventory and cost of goods sold under this system.

Inventory as a Current Asset: Products held for resale, classified as current assets.
Cost of Goods Sold (COGS):
- An expense representing the cost of inventory sold to customers.
- Gross margin is calculated as Revenue - COGS.

Merchandisers:
- Retailers: Sell directly to consumers.
- Wholesalers: Sell to retailers.
- Merchandise inventory: Finished goods held for resale.
Manufacturers:
- Transform raw materials into finished goods.
- Classification of inventory:
- Raw materials: Basic ingredients.
- Work-in-process: Current production costs.
- Finished goods: Completed products ready for sale.

Cost Components: Cost includes purchase price, freight charges, insurance, taxes.
Shipping Terms: Determines cost bearing and ownership transition:
- F.O.B. Shipping Point: Title passes at shipping point; buyers pay transportation (freight-in).
- F.O.B. Destination: Title passes at delivery; sellers pay transportation (freight-out).

Perpetual System: COGS is updated with each sale.
Periodic System: COGS recorded only at period end, inventory updated with physical count.

Recording Purchases: Increase the inventory account; purchase invoices track costs and discounts.
Sales Entries: Recognize sales and reduce inventory for goods sold.
Sales Returns: Use contra-revenue accounts to adjust sales and inventory for returns.

Cost Allocation: Allocate costs between ending inventory and COGS.
- Key methods:
1. Specific Identification: Track actual costs for individual items; suitable for high-cost items.
2. FIFO (First-In, First-Out): Assumes oldest inventory is sold first; reflects physical flow in many cases.
3. Weighted Average Cost: Uses a moving average after each purchase to allocate costs.

Financial Statements: Different methods affect net income, tax payments, and asset valuation.
Income Tax: Short-term choices can defer tax payments but do not eliminate them.
Lower of Cost and Net Realizable Value (LCNRV): Value inventory at the lower of its cost or net realizable value; reduces inventory valuation if necessary.

Track purchases as temporary accounts until physical count; includes purchases, discounts, returns, and transportation.
Inventory costing methods also apply under periodic systems, but with different approaches for calculating ending inventory and COGS.

Impact two accounting periods; ending inventory of one period becomes the beginning inventory of the next. Errors can lead to understating/overstating:
- COGS, net income, total assets.

Current trends indicate convergence of accounting standards, but minor differences still exist between IFRS (IAS 2) and ASPE (CPA Canada Handbook Section 3031).