Inventory

Quick Study Sheet

Inventory:
Items that you buy or make only for the purpose of selling the items to customers.

F.O.B. Destination: Buyer owns when they receive the goods

F.O.B. Shipping: Buyer owns at the time it is shipped (owns in transit)

Goods on Consignment: A company holds inventory for someone else

Calculating Cost of Goods Sold:

Beginning Inventory
+ Purchases
= Available for sale
– Ending Inventory Balance sheet
= Cost of Goods Sold Income statement

FIFO (first in – first out):

Units purchased first are sold first.

The last units purchased are the ones you have left

LIFO (last in – first out):

Units purchased last are sold first.

The first units purchased are the ones you have left

Weighted Average:

Inventory is valued at average cost per unit:

Total available cost / by total available units

Effect of changing costs.

In times of inflation:
FIFO gives a lower cost of goods sold and higher income than LIFO

In times of deflation:
FIFO gives a higher cost of goods sold and a lower income than LIFO

Lower of Cost or Market (LCM)

Inventory is initially valued at the purchase cost –

Cannot report at higher than market value

Compare cost to market value (also called replacement cost)

If cost is more than market, reduce cost to market.

Two Methods to record inventory:

Periodic –

Record inventory purchases initially as an “purchases” expense

Record sales without recording the change to the inventory

Adjustment at the end of the period:

1) Inventory – to get inventory to what you really have
2) Purchases – to get purchases to equal 0
3) Difference to Cost of Goods Sold

Perpetual –

Record to the inventory account every time inventory moves

Record inventory purchases to “inventory”

Record sales at the price to the customer and the decrease to inventory at cost:

Final adjustment to inventory and cost of goods sold to be what you really have on hand.

Inventory Errors:

Ending Inventory too high, CGS too low, Income too high

Inventory and Income move the same direction.

Cost of goods sold and income move the opposite direction.