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Questions and Answers
What does merchandise inventory include?
All goods that a company owns and holds for sale, regardless of location.
What are goods on consignment?
Goods shipped by the owner (consigner) to another party (consignee).
How are damaged or obsolete goods treated in inventory?
They are not counted if they cannot be sold. If they can be sold at a reduced price, they are included at a conservative net realizable value.
What does FIFO stand for?
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What is LIFO?
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How do you calculate the weighted average cost flow?
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Which costing method yields the highest gross profit?
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How is inventory reported under the lower of cost or market method?
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What happens if ending inventory is understated?
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How is cost of goods sold calculated?
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What is inventory turnover?
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How do you calculate day's sales in inventory?
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Study Notes
Merchandise Inventory
- Merchandise inventory includes all goods owned by a company for sale, irrespective of their location.
- Special attention is needed for goods in transit, goods on consignment, and damaged or obsolete items.
Goods on Consignment
- Goods consigned are those shipped by the owner (Consigner) to another party (Consignee) for sale.
Damaged or Obsolete Goods
- Damaged or obsolete items are excluded from inventory if unsellable.
- If they can be sold at reduced prices, include them at a conservative estimate of their net realizable value.
Inventory Costing Methods
- FIFO (First-in, First-out): Assumes costs flow in the order incurred. Earlier purchases are sold first, affecting cost of goods sold and ending inventory.
- LIFO (Last-in, First-out): Assumes costs flow in reverse. Most recent purchases are sold first, impacting cost of goods sold and ending inventory.
- Weighted Average: Costs are averaged across available inventory, reflecting overall cost for goods sold.
- Specific Identification: Identifies each item with a specific purchase and invoice for accurate tracking.
Financial Statement Effects of Costing Methods
- FIFO results in lower cost of goods sold, leading to higher gross profit and net income.
- LIFO results in higher cost of goods sold, leading to lower gross profit and net income.
- Weighted average produces results between FIFO and LIFO.
- Specific identification results vary based on which units are sold.
- Declining cost scenarios can invert advantages of FIFO and LIFO.
Lower of Cost or Market (LCM)
- Merchandise is reported on the balance sheet at the lower of its cost or market value.
- LCM can be applied individually to items, to major categories, or to the inventory as a whole.
- Adjustments to inventory are made by debiting cost of goods sold and crediting merchandise inventory if adjustments to market value are needed.
Financial Statement Effects of Inventory Errors
- Understated ending inventory leads to overstated cost of goods sold and understated net income in year 1; opposite occurs in year 2.
- Overstated ending inventory leads to understated cost of goods sold and overstated net income in year 1; opposite occurs in year 2.
LCM Calculation
- Calculate total cost and total market value, applying the lower of the two to determine inventory valuation.
Cost of Goods Sold (COGS) Calculation
- COGS is calculated as beginning inventory + net purchases - ending inventory.
Inventory Turnover
- Inventory turnover is measured by cost of goods sold divided by average inventory, reflecting efficiency in inventory management.
Day's Sales in Inventory
- Calculated as ending inventory divided by cost of goods sold, multiplied by 365, indicating how long inventory is held before sale.
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Description
Test your knowledge of key concepts from Accounting 211, Chapter 5. This quiz focuses on essential definitions and terms related to merchandise inventory, including special considerations like goods in transit and consignment. Perfect for mastering inventory accounting principles!
