Accounting Inventory

only 1 = inventory

Raw Materials Work in Process Finished Goods

Check accuracy of inventory records. Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft).

Determine the inventory on hand. Determine the cost of goods sold for the period

counting, weighing , measuring

when the business is closed or business is slow. at end of the accounting period.

Purchased goods not yet received. Sold goods not yet delivered.

buyer pays freight cost

seller pays freight cost

Goods held for sale by one party. Ownership of the goods is retained by another party.

Method should be used consistently, enhances comparability. Although consistency is preferred, a company may change its inventory costing method.

Companies must "write down" the inventory to its net realizable value in the period in which the price decline occurs. Net realizable value = net amount that a company expects to receive from the sale of inventory (estimated selling price in the normal course of business, less estimated costs to complete and sell).

Failure to count or price inventory correctly. Not properly recognizing the transfer of legal title to goods in transit. Errors affect both the income statement and statement of financial position.

computation of cost of goods sold and net income.

beginning inventory + Cost of goods purchased - ending inventory

COGS= understated, net income = overstated

COGS=overstated, net income = understated

COGS= overstated, net income = understated

COGS= understated, net income = overstated

two periods

An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period. Over the two years, the total net income is correct because the errors offset each other. Ending inventory depends entirely on the accuracy of taking and costing the inventory.

COGS = beginning inventory + Cost of goods purchased - ending inventory

assets are overstated and equity is overstated no effect on liability

assets are understated and equity is understated no effect on liability

Inventory classified as current asset

Cost of goods sold - sales.

major inventory classifications, basis of accounting (cost or LCNRV), and costing method (specific identification, FIFO, or average)

High Inventory Levels - may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage). Low Inventory Levels - may lead to stockouts and lost sales.

measurement of the number of times on average the inventory is sold during the period.

COGS / average inventory

average number of days inventory is held

days in year (365)/ inventory turnover

Estimates the cost of ending inventory by applying a gross profit rate to net sales.

net sales - estimated gross profit = estimated COGS COGS available for sale - estimated COGS = estimated cost of ending inventory

Company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost.

goods available for sale at retail - net sales = ending inventory at retail goods available for sale at cost /goods available for sale at retail = cost to retail ratio ending inventory at retail x cost to retail ratio = estimated cost of ending inventory