Chapter 6 – Reporting and Analysing Inventory - RhuM'antiK



Chapter 6 – Reporting and Analysing Inventory Classifying and determining inventory?Merchandising company: Merchandising inventory Items held for sale to customers ?Manufacturing Inventories:?Inventory may not yet be ready for sale. Inventory is usually classified into 3 categories:Raw materials: basic good that will be used in production but have not yet been placed into production.Work in process: That portion of manufactured inventory that has been placed into the production process but is not yet completeFinished goods: Items that are completed and ready for sale. ?Determining Inventory quantities: ?Taken for two reasons?Perpetual systemCheck accuracy of inventory records Determine amount of inventory lost due to wasted raw materials, shoplifting or employee theft. ?Periodic systemDetermine the inventory on handDetermine the cost of goods sold for the period ?Taking a physical inventory ?Involves counting, weighing, measuring each kind of inventory on hand.Taken: When the business is closed or slow At the end of the accounting period. ??Determining ownership of goods ?Goods in transit: purchased goods not received yetsold goods not yet delivered.?Note: should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale. ?2 types: FOB (free on board) shipping point: Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. FOB destination: Ownership of the goods remains with the seller until the goods reach the buyer. ?Consigned goodsHold the goods of other parties and try to sell the goods for them, for a fee but without taking ownership of the goods Property of the business consigning the goods and are not carried in the inventory of the consignee??Inventory costing ?Inventory is accounted for at costs?Cost includes ALL expenditures necessary to acquire goods and place them in a condition ready for sale. Unit costs are applied to quantities to determine the total costs of the inventory and the cost of goods sold using the following costing methods: Specific IdentificationFirst in, First out (FIFO) Last in First out (LIFO)Average cost (weighted average) Specific identification?Actual physical flow costing method Items still in inventory are specifically costed to arrive at the total cost of the ending inventoryPractice is relatively rareMost companies make assumptions (cost flow assumptions) about which unis were sold ?Cost flow Assumptions ?FifoCosts of the earliest goods purchased are the first to be recognized in determining cost of goods sold Often parallels actual physical flow of merchandiseCompanies determine the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed ?LifoCost of the latest goods purchased are the first to be recognized in determining cost of goods sold Seldom coincides with actual physical flow of merchandiseExceptions include goods stored in piles, such as coal or hay?Average Cost Allocates cost of goods available for sale on the basis of weighted average unit cost incurred Applies weighted average unit cost to the units on hand to determine cost of the ending inventory ?Inventory costing ?Using Cost flow methods consistently ?Method should be used consistently, enhances comparabilityAlthough consistency is preferred, a company may change its inventory costing method. ?Lower of cost or market ?When the value of inventory is lower than its cost Companies can 'write down' the inventory to its market value in the period in which the price decline occurs Market value = replacement costExample of conservatism ??Analysis of inventory ?Inventory management is a critical task: ?High inventory levels: storage costs, interest cost, and costs associated with the obsolescence of technical goods or shifts in fashionLow inventory levels: may lead to lost sales ??Inventory turnover ratio = costs?of?good?soldaverage?inventory??Days in inventory = 365inventory?turnover?ratio??? ................
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