University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

38

Pages:

1
Author:

stud_ice13

Key Points: 1. Goods in Transit: o FOB Shipping Point: The buyer includes goods in inventory as soon as they are shipped. o FOB Destination: The buyer includes goods in inventory only when they arrive at the destination. 2. Goods on Consignment: o The consignor (owner) includes consigned goods in their inventory until they are sold by the consignee. The consignee does not include these goods in their inventory. 3. Damaged or Obsolete Goods: o If damaged or obsolete goods cannot be sold, they are excluded from inventory. If they can be sold at a reduced price, they are reported at net realizable value (sales price minus selling costs). A loss is recorded when damage or obsolescence occurs. 4. Determining Inventory Costs: o Inventory costs include the invoice cost minus any discounts, plus shipping, storage, import duties, and insurance costs. Advertising and salaries are not included in inventory costs but are considered period expenses. o Expense Recognition Principle: Inventory costs are expensed as Cost of Goods Sold when the inventory is sold. 5. Internal Controls and Physical Counts: o To ensure the accuracy of inventory records, companies conduct a physical count of inventory, typically once a year. This count adjusts the inventory account to reflect actual stock, accounting for theft, loss, damage, and errors. o Internal controls during inventory counts include pre-numbered inventory tickets, separate counters from inventory handlers, verification of inventory existence and condition, and multiple counts for accuracy. Auditors also verify the counts. Example Applications: 1. Master Carver’s Inventory: o The carver includes 14 units (17 total minus 3 damaged) in her garage inventory, excluding the 5 units in transit (FOB destination) but including the 11 units on consignment. 2. Cost of Artistic Iron Fixture: o For the iron-based fixture, the inventory cost includes the invoice cost ($1,000) plus transportation-in ($150), import duties ($300), and insurance ($100), totaling $1,550. The other costs (advertising, gratuity, lighting, and salaries) are not included in the inventory cost.