This is a draft cheat sheet. It is a work in progress and is not finished yet.
Inventory Analysis
Objectives to control inventory |
1. Safeguard inventory from damage/theft. 2. report inventory on financial statements |
Purchase Order: |
authorizes purchase of inventory from approved vendor |
Receiving Report: |
Establishes an initial record of the receipt of inventory |
Subsidiary inventory ledger: |
Recording inventory for perpetual inventory system |
Physical Inventory: |
Count of inventory should be taken near year-end to make sure quantity of inventory reported in financial statements is accurate |
Average Unit Cost= |
Total Cost of Units Available for Sale / Units Available for Sale |
Inventory Cost Flow Assumptions
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specific identification inventory cost flow method the unit sold is identified with a specific purchase
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first-in, first out (FIFO) inventory cost flow method the first units purchased are assumed to be sold first and the ending inventory is made up of the most recent purchases
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last-in, first out (LIFO) inventory cost flow method the last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased
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average inventory cost flow method the cost of the units sold and in ending inventory is an average of the purchase costs
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Inventory Cost Flow Assumptions
INVENTORY TURNOVER
Measures relationship between cost of merch sold and amount of inventory carried during the period |
INVENTORY TURNOVER = |
Cost of Merch Sold / Average Inventory |
NUMBER of DAYS' SALES in INVENTORY = |
Average Inventory / Average Daily Cost of Merch Sold |
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Recording Merchandise Transactions
Purchases: |
of inventory are recorded in purchases account RATHER than in merchandise inventory account |
Purchase Discounts |
Normally recorded in separate purchases discounts account. Balance of purchases discounts account is recorded as deduction from PURCHASES for the period. |
Purchases Returns & Allowances: |
Recorded in similar manner to purchase discounts |
Freight In: |
When merchandise is purchased FOB shipping point, the buyer pays for the freight. Under the periodic inventory system, freight paid when purchasing merchandise FOB shipping point is debited to Freight In |
PERIODIC INVENTORY
FIFO the earliest batch purchased is considered the first batch of merchandise sold. The physical flow does not have to match the accounting method chosen. This time we will be examining the periodic inventory system |
LIFO: most recent batch purchased is considered the first batch of merchandise sold. The actual flow of goods does not have to be LIFO. For example, a store selling fresh fish would want to sell the oldest fish first (which is FIFO), even though LIFO is used for accounting purposes |
PERIODIC
Sometimes called the weighted average method. It uses the average unit cost for determining cost of merchandise sold and the ending merchandise inventory |
Average Unit Cost = Total Cost of Units Avail for Sale / Units Avail for Sale |
AVERAGE COST METHOD
Average Cost Method: used in a perpetual system, an average unit cost for each item is computed each time a purchase is made |
This unit cost is then used to determine the cost of each sale until another purchase is made and a new average is computed. This is called a moving average |
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INVENTORY COSTING METHODS
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