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Chapter 6-Merchandise Inventory
Terms in this set (20)
The accounting principles associated with merchandiser inventory are:
states that a business should use the same accounting methods and procedures from period to period
-consistency helps investors and creditors compare financial statements from one period to the next
financial statements should report enough information for outsiders to make knowledgeable decisions about the company
-information should be relevant and should be represented faithfully
states that a company must perform strictly proper accounting only for items that are significant to the business's financial situation
-information is significant when it would cause someone to change a decision
means a business should report the least favorable figures in the financial statements when two or more possible options are presented
-anticipate no gains, but provide for all probable losses
-record an asset at the lowest reasonable amount and a liability at the highest reasonable amount
-when there's a question, record an expense rather than an asset
-choose the option that undervalues, rather than overvalues, your business.
Control over Merchandise Inventory
good inventory controls ensure that inventory purchases and sales are properly authorized and accounted for by the accounting system by:
-ensuring inventory is purchased with proper authorization
-tracking and documenting receipt of inventory
-recording damaged inventory properly
-performing physical counts of inventory annually
-recording and removing inventory sold.
Data Analytics in Accounting
-inventory is one of the most important assets for merchandising and manufacturing companies
-businesses can evaluate their inventory by using data analytics tools.
How are merchandise inventory costs determined under a perpetual inventory system?
-at the end of the period, count the units in ending inventory and assign dollar amounts to the account
-at the end of the period, determine the units sold during the period and assign dollar amounts to cost of goods sold
Ending Merchandise Inventory
Ending Merchandise Inventory =
Number of units on hand *
Cost of Goods Sold
Cost of Goods sold =
Number of units sold *
Inventory Costing Method
approximates the flow of inventory costs in a business that is used to determine the amount of cost of goods sold and ending merchandise inventory
is an inventory costing method based on the specific cost of particular units of inventory
used for inventories that include:
First-in, First Out (FIFO) method
assumes the first units purchased are the first to be sold
-cost of goods sold is based on the oldest purchases.
-ending inventory closely reflects current replacement cost
-Cost of goods available for sale is the total cost spent on inventory that was available to be sold during a period
Last-in, Last-out (LIFO)
as inventory is sold, the cost of the newest item in inventory is assigned to each unit as Cost of goods sold.
-COGS closely reflects current replacement cost
-ending inventory contains the oldest costing units.
computes a new weighted average cost per unit after each purchase
-weighted average cost per unit is determined by dividing the cost of goods available for sale by the number of units available
weighted-average cost per unit = cost of goods available for sale/number of units available
How are financial statements affected by using different inventory costing methods?
-COGS is higher under LIFO than under FIFO when costs are rising
-Net income is lower under LIFO than under FIFO when costs are rising
-when costs are increasing, FIFO inventory will be the highest, and LIFO inventory will be the lowest
Lower-of-cost-or-market (LCM) rule
requires that inventory be reported in the financial statements at the lower of the inventory's historical cost or its market value
-market value generally means the current replacement cost
What are the effects of merchandise inventory errors on the financial statement?
ending inventory number is used in other computations, when ending inventory is incorrect, other numbers will also be incorrect, such as:
measures how rapidly inventory is sold
-the ratio should be evaluated against industry averages
-a high turnover rate indicates ease of selling
-a low turnover rate indicates the difficulty of selling
inventory turnover=COGS/Avg merchandise inventory
Avg merchandise inventory= (beginning merchandise inventory + ending merchandise inventory) / 2
Days' Sales in inventory
measures the average number of days inventory is held by the company
Days' sales in inventory =365 days / inventory turnover
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