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

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Merchandize Inventory