Chelsea Katz BMGT 220 10 13 13 CHAPTER 6 INVENTORIES Two primary objectives of control over inventory 1 safeguarding the inventory from damage or theft 2 reporting inventory in the financial statements ALL inventory control begins as soon as inventory is ordered Purchase order Inventory control documents purchase order receiving report vendor s invoice vendor personnel to indicate materials have been received inspected authorizes the purchase of the inventory from an approved form electronic transmission used by the receiving Receiving report Compare purchased order with receiving report to ensure inventory received is what was ordered Subsidiary inventory ledger contains individual accounts for items of inventory controls for safeguarding inventory can be security measures too ex locking up inventory etc Cost Flow Assumption 1 cost flow is in the order in which costs are incurred 2 cost flow is in the REVERSE order in which costs are incurred 3 cost flow is an average of the costs Inventory costing methods 1 FIFO first in first out 2 LIFO last in first out 3 Weighted Average Cost specific identification inventory cost flow method unit sold is identified with specific purchase end inventory is remaining units on hand FIFO first in first out based on assumption that costs of merchandise sold should be charged against revenue in order which costs are incurred LIFO last in first out based on assumption that most recent merchandise inventory costs should be charged against revenue weighted average cost of units sold and in ending inventory are weighted average purchase costs FIFO often is the same results as specific identification method ex milk that s closer to expiring is stocked in front of shelves by grocery store earliest purchase sold first FIFO costs are included in cost of merchandise sold in order which they were purchased LIFO cost of units sold cost of most recent purchases IFRS international financial reporting standards Weighted average cost method a weighted avg unit cost for each item computed each time a purchase is made unit cost used to determine cost of each sale until another purchase is made new average is computed technique called MOVING AVERAGE perpetual inventory systems often computerized easier to monitor keep track of with periodic inventory systems only revenue is recorded each time a sale is made weighted average unit cost total cost of units available for sale units available for sale FIFO LIFO weighted avg inventory yield different amounts for cost of merchandise sold gross profit net income ending merchandise inventory if costs prices do NOT change they d yield the same but normally costs prices DO change larger FIFO gross profit net income sometimes called inventory profits or illusory profits LIFO reports lowest amount of gross profit Inventory may be valued other than cost when o cost of replacing items in inventory are below recorded cost o inventory cannot be sold at normal prices due to imperfections style changes or other causes lower of cost or market method LCM inventory at lower of it s cost or current market value replacement cost values inventory that reports the ways to apply LCM o each item in the inventory o each major class category of inventory o total inventory as a whole net realizable value estimated selling price of an item of inventory less any direct costs of disposal such as sales commissions net realizable value estimated selling price direct costs of disposal direct costs of disposal selling expenses special advertising sales commissions merchandise inventory is reported in current assets section of balance sheet also reported avg method of determining cost of inventory LIFO FIFO weighted method of valuing inventory cost or LCM not UNUSUAL for large business to use different costing methods for segments of inventories Reasons for inventory errors Physical inventory on hand miscounted Costs incorrectly assigned for inventory ex FIFO LIFO or weighted average are incorrectly applied Inventory in transit is incorrectly included excluded from inventory Consigned inventory is incorrectly included excluded from inventory merchandise that is shipped by manufacturer s to consigned inventory retailers who act as manufacturers selling agent manufacturer in consigned inventory arrangement consignor consignee retailer in consigned inventory arrangement 2 measures of efficiency effectiveness of inventory management inventory turn over 1 2 of days sales in inventory relationship between cost of goods sold and amount of inventory turn over inventory carried during period cost of goods sold average inventory how to compute merchandise sold reasons business may need to estimate amount of inventory average inventory average daily cost of of days sales in inventory o perpetual inventory records are not maintained o disaster ex flood fire destroys inventory records and inventory o monthly quarterly financial statement are needed by physical inventory is taken only once per year estimates inventory cost based on relationship of estimates inventory cost based on relationship of retail inventory method cost to retail price gross profit method gross profit to sales
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