Reporting and Analyzing Inventory
Determining Inventory quantities
Determining ownership o goods
Taking physical inventory, making count adjustments, internal controls
Inventory cost determination formulas
Spcific ID, FIFO, Average costs
Effects of cots formulas
Presentation and alalysis of inventory
Inventory costs formulas in a periodic system
Determining Inventory Quantities
Whether companies use a periodic or perpetual system, physical inventory must still be counted at the end of each accounting period
To check the accuracy of the perpetual inventory records
To determine the amount of inventory lost to shrinkage or theft
Determining Ownership
Ownership of goods must be considered when taking inventory
Goods in transit at the end of period determine of ownership more complicated
Determine who has legal title to good in transit
Include in inventory if company has legal title
Apply fright/shipping concepts from chapter 5
Ownership of cosigned goods remains with the owner (the consignor) not the holder of the goods
Goods taken home on approval by a customer are still owned by the company
Taking a Physical Inventory
To ensure inventory is properly counted, companies must ave a good system of internal control
Internal control systems include control activities, such as review and reconciliation
Counting inventory is a control activity
Allows reconciliation to information in a company's inventory system
Inventory Cost Formulas
Once inventory quantites are counte, must apply unit costs to determine total cost of inventory
Journal entries used to recrd purchaes of inventory only show the total costs, no the per unit cost
Units of the same inventory can be purchases at different prices
Which costs should be used?
Specific Identification
Tracks physical flow of goods
Each unit of inventory is tagged with is specific cost
Used in perperual system only
Can only be used where
Actual costs of each item can be determined
Goods are easily distinguishable
Goods can be produced and segregated for specific projets
Cost Formulas -FIFO and Average Cost
Cost formulas assume a flow of costs that may not be the same as the actual flow of goods
FIFO (First in First out)
Assumes that the earliest goods purchased are the first to be sold
Cost of first item purchases is costs of first item sold
Cost of ending inventory will be determined using the cots of the most recently purchased items
Average Cost
Cost is determined using a moving (wieghted) average of the unit cost of the items purchased
First in, First out (FIFO)
Merchandise inventory is recorded at most recent cost in the current assets seciton of statement of finacnal position
Cost of goods sold is recorded as an expense at oldest inventory cost on the statement of income
Ending inventor and cost of goods sold under FIFO are the same for periodic and perpetual inventory systems
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Average Cost
Used when physical flow of inventory cannot pecifically be measured
Under a perpetual inventory system, a new eighted average unit cost is calculated after each purcahse
Used to record cost of goods sold and ending inventory
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Choice of Inventory Cost Formula
Choose a formula that best
Represents as closely as possible the physical flow of goods
Reports ending inventory at recent costs
Use the same formula for inventories of similar nature and usage
Summary of Financial Statement Effects
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Valuing inventory at the lower of cost and net realizable value
When the net realizable (fair) value is less than cost, the value is written down
Called the lower of cost and net realizable value LCNRV rule
Net realizable value NRV is selling price less any costs to make goods ready for sale
LCNRV Rule- Application
Apply rule to individual inventory intems
Reduce inventory by crediting it for the amount of write down debit is to cost of goods sold accoutn
Reverse write down if value subsequenctly recovers
When condition that caused the write down have changed
Reporting Inventory
In the statement of fianancial position
At the lower of cost and NRV
In the notes to the statements
Total amoutn of inventory
Costs of goods sold
Cost formulas used
Amoutn of write downs to NRV or reversals
Amoutn of any inventory pledged as security
No signigicant differences between IFRS and ASPE
Inventory turnover
How much inventory should a company have?
2 ratio to help manage
Inventory turn over ratio - measures the number of times, on average inventory is sold in a epriod
Days in inventory ratio convert inventory turnover ratio in number of days inventory is held
Inventory ratios
In general, the higher the inventory turnover and the lower the days in inventry ratios, the better
Inventory turnover= cost of goods sold/ average inventory
Days in inventory = 365 days/inventory turnover
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