Merchandising Companies: perchance inventories that is primarily in finished form for resale to customers.
There are two types of merchandising companies
1. Wholesalers: resell inventory to retail companies or professional users.
2. Retailers: purchase inventories from manufactures or wholesalers and then sell this inventory to end users. Ex. Best buy, target
Manufacturing Companies: manufacture the inventories they sell, rather than buying them in finished form from suppliers. Ex apple, coke
Inventory for a manufacturers have three categories:
Raw materials: cost of components that will become part of the finished product but have not yet been used in production
Work in process: products that have started the production process but are not yet complete at the end of period
Finished goods: items that are complete.
Inventories journey begins when manufacturing companies purchase raw materials hire workers and incur manufacturing overhead during production. One the products are finished manufactures pass inventories to mechanizing companies, whether wholesalers or retailers. Merchandising companies then sell inventories to you, the end users.
Cost of Goods Sold:
Inventory represents the cost of inventory not sold, and cost of goods sold represents the cost of inventory sold.
Cost of goods available for sale
Cost of goods Sold
Inventory Cost Metholds:
Matches-identifies- each unit of inventory with its actual cost.
For example: Fine Jewelry, cars, artwork.
This method is only practical for companies selling unique, expensive products with low sales volume.
First in, First out:
We assume the first units purchases are the first ones sold.
We assume the beginning inventory sells first, followed by the inventory from the first purchase during the year, followed by the inventory from the second purchase during the year, and so on.
Note: Companies are allowed to report inventory costs by assuming which units of inventories are sold and not sold even if this does not match the actual flow.
Last in, First Out:
We assume the last units purchased are the first ones sold.
Note: Nearly all companies sell their actual inventory in a FIFO manner; but they are allowed to report it as if they sold it in a LIFO manner.
We assume that both cost of goods sold and ending inventories consist of a random mixture of all goods available for sale.
To Calculate the cost at the end of the year:
Cost of goods available for sale
Number of units available for sale
Assumes the lower costs of the easliers purchases become cost of goods sold first, leaving higher costs of the later purchases in ending inventory.
Accountants usually call FIFO the balance sheet approach because it better approximates the current cost of inventory.
Most companies follow FIFO
Results in higher ending inventory, lower cost of goods sold and higher reported profit then LIFO
Will report both the lowest inventory and lowest gross profit.
Accountants Call LIFO the income statement approach because it reports the cost of goods sold more realistically matches the current cost of inventory needed to produce current revenues.
The primary benefit from choosing LIFO is tax savings.
LIFO conformity rule: requires a company that uses LIFO for tax reporting to also use LIFO for financial reporting.
Recording Inventory Transactions:
Perpetual Inventory System: With the help of scanners and bar caods keep a continual recors of inventory. Which helps a company better manage its inventory levels.
Recording inventory purchases and sales
Credit : Accounts Payable
On July 17 Mario sold 300 units of inventory on account for $15 each, resulting in a totoal sales of 4,500. WE MAKE TWO ENTIRES TO RECORD THE SALE!
First entry shows the increase to the asset account
The second entry adjusts…