Retail Inventory Management

• Providing the right merchandise at the right time and place is vital for companies selling products
• These companies include;
  • Chain stores
  • Grocery stores
  • Drugstores
  • Department stores
• Kroger Co. is a giant retailer with various store formats:
  • Grocery stores
  • Multidepartment stores
  • Convenience stores
  • Mall jewelry stores
• Kroger operates under nearly two dozen banners and is one of the country's largest grocery retailers
• Kroger has 2,486 grocery retail stores and 2007 sales of $70.2 million
• Kroger also operates 42 food-processing or manufacturing facilities that produce private-label products
• These facilities, plus 396 supermarket fuel centers and 1,965 in-store pharmacies result in constant inventory changes
• Inventory is a large asset on the balance sheet
• Inventory is an important determinant of the results of operations on the income statement
• Inventory is one of the most significant cash flows on the statement of cash flows
• Accounting for merchandise inventory is challenging due to changing prices
• Companies must maintain records of inventory items for sale and their purchase and sale prices, which change over time
• Determining the expense included in the income statement when inventory is sold to customers adds more complexity
• Inventory consists of all goods owned and held for sale to customers in a merchandising company
• Inventory is expected to be converted into cash within the company's operating cycle
• On the balance sheet, inventory is listed after accounts receivable

Nonfinancial Asset

• Inventory is a nonfinancial asset shown on the balance sheet at cost
• When items are sold, their costs are removed from the balance sheet and transferred to the cost of goods sold,
• Cost of goods sold is offset against sales revenue on the income statement
• In a perpetual inventory system, accounting records parallel the flow of costs
• When merchandise is purchased, its cost is added to the Inventory account
• When merchandise is sold, its cost is removed from the Inventory account and transferred to the Cost of Goods Sold account
• The valuation of inventory and cost of goods sold is critical for managers and financial statement users
• Inventory is a company's largest asset
• The cost of goods sold is its largest expense
• These have significant effects on financial statement subtotals and ratios for evaluating liquidity and profitability
• Pricing inventory and measuring the cost of goods sold uses different methods under generally accepted accounting principles
• Different methods can produce significantly different results on financial statements and income tax returns
• Identical units of inventory can be acquired at different costs due to purchase date, supplier, or quantity
• Managers and investors should know the effects of different inventory valuation methods

Cost Removal Differences

• Purchases of merchandise are recorded the same way but the methods determining the cost
• The cost is then removed from the Inventor}' account when merchandise is sold
• Chapter 6's basic entries relating to purchases and sales made the simplifying assumption that all units
• In inventory had been acquired at the same unit cost due to identical units of a given
• Product often has different acquisition costs in it's inventory
• Arises from:
  • Different dates
  • Different suppliers, -Different quantities

Illustration data

• Mead Electric Company sells electrical equipment and supplies
• The company's inventory includes five identical Elco AC-40 generators
• Two were purchased on January 5 for $1,000 each
• Three were purchased a short time later for $1,200 each after news of a price increase
• The Balance columns contain two "layers" of unit cost information on February 5
• A new cost layer is created whenever units are acquired at a different per-unit cost
• A business is unlikely to have more than three or four cost layers in its inventory at any given time
• On March 1, Mead sells one Elco generator to Boulder Construction Company for $1,800 cash
• The question is whether the cost of goods sold should be $1,000 or $1,200
• Accountants address this by methods called specfic identification, or they use a cost flow assumption
• Once an approach has been selected, apply consistently in accounting
• Do so for all sales of that particular type of merchandise

Specific identification

• Specific identification can be used only when the actual costs of individual units of merchandise can be determined
• Generator at Meads inventory may have an identification number, showing on purchase invoices
• Mead's accounting department can determine whether the generator sold to Boulder Construction cost $1,000 or $1,200
• actual cost of the unit is used in recording the cost of goods sold

Cost flow assumptions

• If items in inventory are homogeneous in nature (identical, except for insignificant differences)
• Following a cost flow assumption (or flow assumption) becomes more suitable for companies with too many identical inventory items purchased at differentprices
• With cost flow assumption, the seller makes an assumption as to the sequence units are withdrawn from inventory
• For example seller assume the oldest merchandise always is sold first or the most recently purchased is to be sold first
• Three cost flow assumptions are in widespread use: -Average cost: values all merchandise (units sold/ left in inventory) at the average per-unit cost
  • Random order -First-in, first-out(FIFO): goods sold are the first units that were purchased (ie, oldest)
  • Hand, comprise of the recent purchases -Last-in, first-out(LIFO): sold= recently acquired and inventory = earliest purchases.
  • The item selected by company doesnt correspond with company's merchandise and when the items are identical it doesn't matter which units delivered to customer in transaction.
  • Accountants considered cost and physical flows
• Cost flow assumption eliminates the need for separately identifying each unit sold to looking up actual costs
• Provide with useful and reliable measures of costs of goods sold and apple consistently to all sales of type of merchandise

Average cost method

• Average cost = average cost of all units in inventory, after every purchase
• The total cost of goods available for sale /number of units in inventory
• Averages can change which is referred as moving average
• As of January 5, Mead had 2 Elco generators in its inventory, at $1,000 (on average/ per unit) but the purchase later was an additional increase of costs ($1,000)
• The illustration of entries: - The entry to recognize the $ revenue is same, regardless of the inventory method and therefore won't be repeated - The inventory subsidiary ledger shows average unit costs which is shown as exhibit 8-3
• The column for purchases shows actual costs
• Per unit cost 5,600total / 5 units = $1,120 and all items were all assigned the same per-unit cost
• No importantance of units old and costs of goods is based on Unit Costs

FIFO

• Aims at showing a particular method in accounting
• Is often referred First Merchandise = First Merchandise in the amount, so the accountant assumes unit sold were on purchased Jan 5 and entries to record the costs would be shown as: Exhibit 8-4 and FIFO purchases actual/ Average costs with sales with transaction
• Inventory includes costs including units sold transaction and cost layers and Mead sold.
• Total goods sold, $4000 includes units at two different unit costs
• In inventory is valued at recent unit costs

LIFO

• Common of widely used methods of determining costs of goods sold and valuing inventory most recently purchased merchandise
• In assumed that it's sold. Thus costs are $1,000 shown below
• inventory ledger record (following entry shown) shown as exhibit 8-5 - the like FIFO
• Both different custom units sold transactions all includes more units than another
• Goods come from next most recent layer/ purchased costs the inventory is valued at the oldest units

Evaluation Of Methods

• Three of costs just described, accepted to use in financial and income tax returns
• To be explained, we do not necessary that the physical of the method should correspondence assumption flow:
• Units applied should homogeneous naturally
• Each unit is sold uniquely. for example such as art
• The value must match revenue, cost, good sold, identification
• Inventory has advantages while in shortcomings in the final analysis
• Selection has an advantage with shortcomings all in the final financial statements:
• Disclosure must be accompanied by the statements
• Best suite the inventories of high-priced, and low items is that it is not necessary to Keep track of specific items sold and it is not possible to manipulate income where selecting the specific items to be delivered to customers,
• Changes in current replacement costs of inventory are concealed over all:
• Valuing to ending inventory of cost or good sold
• distinguishing characteristic of the FIFO methods is that prices tend to costs assign lower prices
• causes a business over report with valuations
• some accounts believe overstate and revenue is on current market

Lifo

• Results low valuations in measurement and the most and conservative and during periods of rising costs
• Results and lowering inventory