Merchandize Inventory

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