Study Notes on Inventory Management and Costing Methods (Chapters 6 & 8)

Grade Assessment and Strategy

  • Importance of reviewing grades after an exam.
    • Assess current standing in the course.
    • Set goals for desired outcomes (e.g., passing grade, transfer requirements, honors).

Exam Schedule

  • Upcoming exam covering chapters 6 and 8.
    • Target date: mid-April (2-3 weeks from the date discussed).
    • Subsequent chapters (9 and 10) leading to the final will also be covered.

Chapter Six Overview

  • Focus: Inventory management and cost of goods sold (COGS).
    • No journal entries in this chapter.
    • Emphasis on understanding processes and calculations.

Inventory Inclusion Criteria

  • Definition of inventory: Items bought for resale.
    • Criteria: Only include items that can still be sold.
    • Examination of various inventory concepts previously discussed in chapter five, e.g., journal entries.

Key Situations Affecting Inventory Count

  1. Goods in Transit
    • Ownership determined by shipping terms:
      • FOB Shipping Point: Buyer owns the goods in transit.
      • FOB Destination: Seller retains ownership until delivery.
  2. Consignment
    • The original owner maintains inventory even when goods are with the consignment shop.
    • Consignment shop only helps in selling; it does not own the inventory.
  3. Damaged or Obsolete Goods
    • Can only be counted as inventory if they can still be sold (even at a reduced price).
    • Examples of obsolescence related to technology products (e.g., iPods, computers).

Inventory Evaluation Responsibilities

  • The decision on the salability of inventory lies with the employees in management, not predetermined by accounting rules.
  • Keep track of inventory that is either damaged or obsolete, and record assessment decisions.

Summary of Key Terms

  • Consignor: Original owner of goods sent for consignment.
  • Consignee: Individual or entity receiving the goods.
  • Obsolete: Items no longer in use or demanded.

Inventory Cost Components

  • Expenses associated with acquiring and prepping inventory for sale include:
    • Purchase price of inventory.
    • Shipping costs.
    • Taxes and import duties.
    • Insurance for high-value items.
    • Storage costs until sold.
  • Costs related to marketing or selling activities cannot be included in inventory valuation.

Practical Example: Car Dealership Inventory

  • Example: Car bought at $14,000, including specific costs like shipping and import duties, but not advertising or staff salaries.
  • Ensuring understanding of which costs apply to inventory valuation.

Inventory Costing Methods

Introduction to Inventory Methods

  • Current methods used to determine COGS include:
    • FIFO (First In, First Out): Oldest inventory is sold first.
    • LIFO (Last In, First Out): Newest inventory is sold first.
    • Weighted Average Cost: Average cost of inventory items is calculated and applied.
  • Specific Identification is rarely used in practice as it applies to unique items (e.g., rare diamonds).

FIFO Method

  • The oldest inventory items are sold first.
  • Process for calculations includes maintaining a record of sold inventory against remaining inventory after sales.

LIFO Method

  • The newest inventory items are sold first.
  • Similar to FIFO, calculations involve tracking inventory sales and remaining stock carefully.

Weighted Average Cost Method

  • Average cost of inventory is calculated at time of sale, distributing cost equally among units.

Examples and Practice Problems

  • Practice sessions involving calculations for COGS and remaining inventory using FIFO and LIFO methodologies.
  • Typical problems consist of quantifying inventory sales against available inventory at respective cost layers.

Suggested Homework and Quiz

  • Homework for chapter 6 is due in the following week.
  • Class quiz scheduled to assess knowledge based on discussed content from chapters 6 (focus on inventory methods).

Classroom Dynamics

  • Importance of understanding chronological order of inventory for accurate sales recording.
  • Encouragement to align classroom practices with real-world applications of inventory management strategies.