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Inventory Management Decisions
Primary goals of management decisions: |
1. Maintain sufficient quantity to meet customer needs
2. Ensure quality meets customers expectations
3. Minimize costs of getting/carrying inventory
Reporting Inventory
Income Statement: once items are sold, you remove cost of goods sold from income statement |
Balance Sheet: inventory is set up as an asset when purchased |
Percentage of Credit Sales v Aging of A/R
% (income statement method) easier to compute; aging (balance sheet method) is more accurate |
income statement method: begin by writing journal entries in problem |
balance sheet method: begin by making a chart |
STEPS TO FIFO/LIFO/WEIGHTED AVERAGE
FIFO |
LIFO |
WEIGHTED AVERAGE |
STEP 1: begin by doing COGA. STEP 2: when determining COGS, remember to do FIRST-IN-FIRST-OUT |
STEP 1: SAME AS FIFO STEP 2. REMEMBER TO DO LAST-IN-FIRST-OUT |
STEP 1: SAME AS FIFO AND LIFO STEP 2: DIVIDE COGA BY NUMBER OF UNITS AVAILABLE STEP 3. USE THE NUMBER TO FIND COGS AND COST OF ENDING INVENTORY |
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Sales Transactions
FOB Shipping Point |
FOB Destination |
FOB Shipping: sale recorded when goods leave seller's shipping department
FOB Destination: sale recorded when goods reach destination
FORMULAS
COGS = COGA - EI |
COGA = BI + PURCHASES |
GROSS PROFIT = SALES - COGS |
INTEREST = PRINCIPAL X INTEREST RATE X TIME |
NET RELIZABLE VALUE: A/R TOTAL - ALLOWANCE TOTAL |
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Types of Inventory
Merchandisers |
Manufacturers |
Merchandisers: buy + sell finished goods
Manufacturers: buy raw materials + produce and sell finished goods
(raw materials, work in process, and finished goods)
Perpetual VS Periodical Inventory Systems
Perpetual: recorded every time item is bought/sold/returned; uses bar codes like Walmart; constantly recording inventory |
Periodical: always updated at the end of accounting period; require inventory to be counted at the end of every period |
Financial Statement Effects (rising prices)
FIFO: COGS smaller than LIFO, Gross Profit larger than LIFO, Net Income larger than LIFO, Inventory larger than LIFO |
LIFO: COGS larger than FIFO, gross profit smaller than FIFO, Net income smaller than FIFO, inventory smaller than FIFO |
JOURNAL ENTRY EXAMPLES
BAD DEBT EXPENSE: debit bad debt expense, credit allowance |
CASH COLLECTIONS: debit cash, credit A/R |
CREDIT SALES: debit A/R and credit |
WRITE OFFS: debit allowance, credit A/R |
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