Inventory Reporting and Analysis Notes

Inventory is classified as a current asset on the balance sheet, typically less liquid than cash or receivables.
Valuation of inventory is done at the lower of cost and market value.

Goods Purchased for Resale: Products bought for the purpose of selling them.
Raw Materials: Basic materials used to produce goods.
Work-in-Process: Items that are in various stages of production but are not yet finished.
Finished Goods: Completed products ready for sale.
Other Inventory: Any additional types of inventory pertinent to the industry.

Regardless of using a periodic or perpetual inventory system, a physical inventory count is necessary at the end of the accounting period.
This practice helps determine:
- The accuracy of the perpetual inventory system if it is in place.
- Any shrinkage due to theft, spoilage, or other factors.

Goods in transit at the end of the reporting period complicate ownership determination.
FOB (Free on Board) Concepts:
- FOB Shipping Point: The buyer assumes ownership as soon as the goods are shipped.
- FOB Destination: The seller retains ownership until the goods reach the buyer's location.
Consigned goods belong to the owner and not the holder, and items taken home on approval remain the property of the seller.

Periodic System:
- Uses temporary accounts for purchases, freight, etc.
- Does not track Cost of Goods Sold (COGS) in real-time.
- Ending inventory determined strictly from a physical count.
Perpetual System:
- Keeps an up-to-date inventory account for all transactions.
- Maintains a continuous balance in the COGS account.
- Adjustments are made based on physical counts, ensuring accuracy throughout the period.

After counting inventory, unit costs must be allocated to calculate total inventory costs.
Cost determination methods include:
- Specific Identification (SI): Used when each inventory item is identifiable (applies mainly in perpetual systems).
- First In First Out (FIFO): Assumes the first items purchased are the first sold; consistent ending inventory across all systems.
- Last In First Out (LIFO): Not permitted under Cdn GAAP standards.
- Average (Weighted Average): Uses a recalculated average cost after each purchase for recording COGS and ending inventory.

Choose a method that:
- Best represents the physical flow of goods.
- Reflects ending inventory at recent costs.
- Remain consistent for inventories of similar nature and usage within the company.

Inventories are written down to their net realizable value when their value declines.
Net Realizable Value (NRV): The expected selling price minus any costs necessary to prepare the goods for sale.
This approach deviates from the historical cost principle and should be evaluated on an item-by-item basis.
Inventory is adjusted by crediting it for the amount of the write-down, debiting the cost of goods sold; reversals are allowed if the value recovers.

Inventory Turnover Ratio: Indicates how many times inventory is sold each year; a higher ratio is preferred.
- Formula: ext{Inventory Turnover Ratio} = rac{ ext{COGS}}{ ext{Average Inventory}}
Days in Inventory: Measures the average time taken to sell an item; a lower number is better.
- Formula: ext{Days in Inventory} = rac{365}{ ext{Inventory Turnover Ratio}}