Also called gross margin, is the excess of sales revenue over the cost of goods sold. It is called gross profit because operating expenses have not yet been subtracted.
Number of Units of Inventory:
The number of inventory units o hand is determined from the accounting records, backed up by a physical count of the goods at year end. Companies do not include in the inventory any goods they hold on consignment because those goods belong to another company, but they do include their own inventory that is out on consignment and held by another company. Companies include inventory in transit from suppliers or in transit to customers, that according to shipping terms, legally belong to them as of the year end.
FOB (free on board):
Indicate who owns the goods at a particular time, and therefore who must pay for the shipping costs.
FOB Shipping Point:
The most common business practice, legal title to the goods passes from the seller to the purchaser when the inventory leaves the seller's place of business. The company purchasing the goods must include goods in transit from suppliers as units in inventory as of the year end.
Title to the goods does not pass from the seller to the purchaser until the goods arrive at the purchaser's receiving dock. These goods are not counted in year-end inventory of the purchasing company.
Is used for inexpensive goods. A fabric store or a lumber yard won't keep a running record of every bolt of fabric or every 2 by 4. Instead, these stores count their inventory periodically, at least once a year, to determine the quantities on hand. Businesses such as restaurants and hometown nurseries also use periodic system because the accounting cost of a periodic system is low.
Uses computer software to keep running record of inventory on hand.This system achieves control over goods such as Pottery Barn furniture, automobiles, jewelry, apparel, and most other type of inventory. Most businesses use the perpetual inventory system.
Is a decrease in the cost of inventory, because the buyer returned the goods to the seller.
Decreases the cost of inventory, because the buyer got an allowance ( a deduction) from the amount owed.
Cost principle applied to all assets:
The cost of any asset, such as inventory, is the sum of all costs incurred to bring the asset to its intended use, less any additional discounts.
4 generally accepted inventory methods:
1. Specific unit cost
2. First-in, first-out cost (FIFO)
3. Average cost
4. Last-in, first-out cost (LIFO)
Sometimes called weighted-average method, is based on the average cost of inventory during the period.
Average cost per unite= Cost of goods available/ # of units available
The first costs into inventory are the first costs assigned to cost of goods sold. The cost of ending inventory is always based on the latest cost incurred.
The last cost into inventory go immediately to cost of goods sold. The cost of ending inventory is always based on the oldest cost
Most attractive feature of LIFO:
Low Income tax payments, which is why about 1/3 of all US companies use LIFO.
LIFO can value inventory at very old costs because LIFO leaves the oldest prices in ending inventory.
When quantities fall below the level of the previous period. To compute cost of goods sold, the company must dip into older layers of inventory cost. Under LIFO, and the prices are rising, that action shifts older, lower costs into cost of goods sold. The result is higher net income. Managers try to avoid a LIFO liquidation because it increases income taxes.
States that businesses should use the same accounting methods and procedures from period to period. Consistency enables investors to compare a company's financial statements from one period to the next.
Holds that a company's financial statements should report enough info for outsiders to make informed decisions about the company. The company should report relevant and representationally faithful info about itself. This means properly disclosing inventory accounting methods, as well as the substance of all material transactions impacting the existence and proper valuation of inventory, using comparable methods from period to period.
Means reporting financial statement amounts that paint the most cautious or moderate immediate picture of the company. The goal of acctg conservatism is representational faithfulness.
Is based on acctg conservatism. Requires that inventory be reported in the financial statements at whichever is lower- the inventory's historical cost or its market value. Applied to inventories, market value generally means current replacement cost, that is, how much the business would have to pay now to replace its inventory. If the replacement cost of inventory falls below its historical cost, the business must write down the value of its goods to market value. The business reports ending inventory at its LCM value on the balance sheet.
Gross Profit percentage:
Also called gross margin percentage, is a markup stated as a percentage of sales.
Gross profit percentage= gross profit/ net sales revenue.
sales - cost of goods sold. Is a key indicator of a company's ability to sell inventory at a profit.