1. Inventory includes raw materials, work-in-progress, and finished goods. It differs from other assets because its turnover generates revenue and earnings as goods are sold.
2. Inventory is initially measured at cost and subsequently at the lower of cost or net realizable value.
3. Common inventory accounting methods are first-in, first-out (FIFO), last-in, first-out (LIFO), and average costing. FIFO matches the oldest costs to cost of goods sold while LIFO does the opposite. Average costing takes a weighted average of all inventory costs.
1. Inventory includes raw materials, work-in-progress, and finished goods. It differs from other assets because its turnover generates revenue and earnings as goods are sold.
2. Inventory is initially measured at cost and subsequently at the lower of cost or net realizable value.
3. Common inventory accounting methods are first-in, first-out (FIFO), last-in, first-out (LIFO), and average costing. FIFO matches the oldest costs to cost of goods sold while LIFO does the opposite. Average costing takes a weighted average of all inventory costs.
1. Inventory includes raw materials, work-in-progress, and finished goods. It differs from other assets because its turnover generates revenue and earnings as goods are sold.
2. Inventory is initially measured at cost and subsequently at the lower of cost or net realizable value.
3. Common inventory accounting methods are first-in, first-out (FIFO), last-in, first-out (LIFO), and average costing. FIFO matches the oldest costs to cost of goods sold while LIFO does the opposite. Average costing takes a weighted average of all inventory costs.
1. Inventory includes raw materials, work-in-progress, and finished goods. It differs from other assets because its turnover generates revenue and earnings as goods are sold.
2. Inventory is initially measured at cost and subsequently at the lower of cost or net realizable value.
3. Common inventory accounting methods are first-in, first-out (FIFO), last-in, first-out (LIFO), and average costing. FIFO matches the oldest costs to cost of goods sold while LIFO does the opposite. Average costing takes a weighted average of all inventory costs.
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ASSIGNMENT 1:
1. Define Inventories and identify those characteristics that distinguish it from other assets. Inventory is the term for the goods available for sale and raw materials used to produce goods available for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders. 1. Raw Materials Materials that are needed to turn your inventory into a finished product are raw materials. For example, leather to make belts for your company would fall under this category. Or if you sell artificial flowers for your interior design business, the cotton used would be considered raw materials. 2. Work-In-Progress Inventory that is being worked on is Work-In-Progress (WIP), just like the name sounds. From a cost perspective, WIP includes raw materials, labor, and overhead costs. Think of the inventory under this category as being a part of the bigger end-product picture. If you sell medical equipment, the packaging would be considered WIP. That’s because the medicine cannot be sold to the consumer until it is stored in proper packaging. It’s literally a work-in-progress. 3. Finished Goods Maybe the most straight-forward of all inventory types is finished goods inventory. That inventory you have listed for sale on your website? Those are finished goods. Any product that is ready to be sold to your customers falls under this category. 4. Overhaul / MRO Also known as Maintenance, Repair, and Operating Supplies, MRO inventory is all about the small details. It is inventory that is required to assemble and sell the finished product but is not built into the product itself. For example, gloves to handle the packaging of a product would be considered MRO. Basic office supplies such as pens, highlighters, and paper would also be in this category.
2. How are the inventories initially and subsequently recognized?
When an inventory item is initially recognized, it is measured at cost. In subsequent periods, inventory is measured at the lower of cost and net realizable value. In subsequent periods, inventory is measured at the lower of market.
3. Enumerate, describe, & give examples of inventory accounting methods.
First-in, First-Out
The FIFO method assumes that the first unit in inventory is the first until sold. For example, during the week a factory produces items. On Monday the items cost is $5 per unit to make, on Tuesday it is a $5.50 per unit. When the item is sold on Wednesday FIFO records the cost of goods sold for those items as $5. So, the balance sheet has the cost of goods sold at $1 and the balance sheet retains the remaining inventory at $5.50. Last-in, First-out
The LIFO method assumes the opposite, that the last item entering inventory is the first sold. That means the factory would record the Wednesday cost of goods sold as $5.50 and the remaining inventory at $5.
Average Cost
This method is the most easy to calculate; it takes a weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory. Assuming the factory made a total of 100 units the price per unit would be $5.00⋅50+$5.50⋅50 100 =$5.25
4. What are the assumptions on inventory cost flow and explain each assumption? The term cost flow assumptions refers to the manner in which costs are removed from a company's inventory and are reported as the cost of goods sold. In the U.S. the cost flow assumptions include FIFO, LIFO, and average. (If specific identification is used, there is no need to make an assumption.) FIFO, LIFO, average are assumptions because the flow of costs out of inventory does not have to match the way the items were physically removed from inventory. FIFO (first-in, first-out) The FIFO (first-in, first-out) method of inventory costing assumes that the costs of the first goods purchased are those charged to cost of goods sold when the company actually sells goods. This method assumes the first goods purchased are the first goods sold. In some companies, the first units in (bought) must be the first units out (sold) to avoid large losses from spoilage. Such items as fresh dairy products, fruits, and vegetables should be sold on a FIFO basis. In these cases, an assumed first-in, first-out flow corresponds with the actual physical flow of goods. LIFO (last-in, first-out) The LIFO (last-in, first-out) method of inventory costing assumes that the costs of the most recent purchases are the first costs charged to cost of goods sold when the company actually sells the goods.
5. What is net realizable value?
Net realizable value (NRV) is the value of an asset that can be realized upon the sale of the asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of the asset.
