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What is Chapter 5 About? [image] |
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Definition
- It emphasizes accounting for inventory
- Methods for assigning costs to inventory
- Items & costs making up merchandise inventory
- Methods of estimating & measuring inventory
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Term
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| · Merchandise inventory includes all goods that a company owns and holds for sale |
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If ownership has passed to the purchaser (goods in transit) |
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| · the goods are included in the purchaser’s inventory |
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If purchaser is responsible for paying freight (goods in transit) |
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| ownership passes when goods are loaded on the transport vehicle |
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If the seller is responsible for paying freight (goods in transit) |
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| ownership passes when goods arrive at their destination |
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| · Goods on consignment are goods shipped by the owner, called the consignor, to another party, the consignee |
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| sells goods for the owner |
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| continues to own the consigned goods and reports them in its inventory |
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Can damaged good or obsolete goods be counted in inventory if they don't sell??? |
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| If goods damaged or obsolete are sold at a reduced price........ |
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| they are included in inventory at a conservative estimate of their net realizable time. |
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| · sales price minus the cost of making the sale |
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| The cost of an inventory item includes: |
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| its invoice cost minus any discount and added or incidental costs (freight, storage, insurance, and costs incurred in an aging process) |
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The matching principle states (determining inventory costs) |
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that inventory costs should be recorded against revenue in the period when inventory is sold. |
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| the ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business |
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| the buyer accepts ownership when the goods depart the seller’s place of business. |
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| The physical count is used to... |
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| Adjust the Inventory account balance to the actual inventory available |
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| Accounting for inventory affects |
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| both the balance sheet and the income statement |
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· Four methods commonly used to assign costs to inventory and to cost of goods sold |
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| specific identification; FIFO; LIFO; and weighted average |
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| assumes costs flow at an average of the costs available |
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· Costs of goods sold plus ending inventory equals |
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| cost of goods available for sale |
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| When purchase prices don’t change, each inventory costing method |
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· assigns the same cost amounts to inventory and to cost of goods sold
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· When purchase costs regularly rise |
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Definition
o FIFO: assigns the lowest amount to cost of goods sold; has the highest gross profit and net income o LIFO: assigns the highest amount to cost of goods sold; the lowest growth profit and net income o Weighted average: yields results between FIFO and LIFO o Specific Identification: always yields results that depend on which units are sold |
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| When costs regularly decline |
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o the reverse occurs for FIFO and LIFO Weighted average: tends to smooth out erratic changes in costs o Specific Identification: exactly matches the costs of items with the revenues they generate |
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| Merchandise inventory is said to be reported on |
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| the balance sheet at the lower of cost or market (LCM) |
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the Lower of Cost or Market can be applied in one of three ways |
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| o To each individual item separatelyo To major categories of itemso To the entire inventory |
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· Accounting rules require that inventory be adjusted to market when |
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| Beginning Inventory + Net cost of purchases – Ending inventory = |
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| Ending inventory is reported as |
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| a current asset on the balance sheet |
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| Cost of goods sold is reported on |
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| Advantages of Weighted Average |
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| Smoothes out price changes |
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| Ending inventory approximates current replacement cost |
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| Better matches current costs in cost of goods sold with revenue |
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