Accounting for Merchandise Inventory:
Cost of Inventory (Intended Use):
Includes all costs of acquisition and preparation for sale
E.g. Warehousing costs, Insurance, Repackaging, Freight-In paid by Buyer, Transportation costs paid by Seller for consignments...
DO NOT include: factory expense, unallocated FOH, excessive spoilage, re-handling costs
Goods in Transit:
FOB Shipping Point: Shipped
Title passes to the buyer when the seller deliver goods to common carrier
Included in Buyer's books @ yr
FOB Destination: Received
Title passes to the buyer when the buyer receives the goods from common carrier
Included in Seller's books until received by Buyer
If goods that have been sold are returned, the seller should reduce net sales and add the cost of items back to inventory (when seller has authorized the goods for return).
All costs associated with inventories will remain on the B/S until sale = Matching Principle
Costs: Purchase + Freight-in (paid by Buyer) + Warehousing Costs (prior to resale)
Financing costs are NOT cost of inventory (but Interest Expense).
Costs incurred @ Sale: Freight-out paid by Seller and Sales Commissions = Selling Expense (Matching Principle)
Consignment Inventory: Consignor to Consignee
Consignor: Ownership
Includes inventory in B/S
Has Ownership, NOT possession
Costs incurred by consignor in transferring goods to consignee are considered inventory costs until sold
Costs of goods, Freight paid on shipping, Warehouse costs, Advertising, In-transit Insurance
Consignee: Possession
Items are NOT included in B/S
Has possession, NOT ownership
When sold - sales price is given to consignor (after commissions)
COGS from Operating Income:
GAAP I/S:
Sales
(COGS)
Gross Margin
(SGA)
Operating Income
COGS = Beg Inv + Net Purchases - End Inv
2 Systems for Measuring Inventory Quantities:
1. Periodic Inventory System (= physical inventory count @ yr-end)
Purchases xx
A/P xx
End Inv xx
COGS (plug #) xx
Purchases xx
2. Perpetual Inventory System (= ongoing and real time)
Inventory 80
A/P 80
A/R 100
Sales Revenue 100
COGS 80
Inventory 80
Adv: enable company to see how much inventory on hand in real time