ACCT 2610 Lecture 16: COGS and Inventory

4 Pages
Unlock Document

Washington University in St. Louis
Accounting ACCT 2610
Lemayian Zawadi

Lecture 12-13: Reporting and Interpreting Cost of Goods Sold and Inventory I. Inventory A. Basics 1. Types of Inventory: Merchandising vs. Manufacturing a. Merchandising inventory (aka retail inventory) consist of one category  inventory b. Manufacturing inventory consists of 3 categories, all reported in one inventory account on the balance sheet: • Raw material inventory • Work in process inventory • Finished goods inventory 2. Merchandise Inventory T-Account a. Beginning Inventory + Purchases – COGS = End Inventory b. Journal Entries • Buying: Dr. inventory, Cr. Cash or A/P • Selling: Dr. COGS, Cr. Inventory c. Given 3 pieces of information, figure out the fourth 3. Manufacturing Inventory a. Raw materials inventory: Items acquired for processing into finished goods (i.e. direct materials), purchased raw materials b. Work in process inventory: Goods in the process of being manufactured but not yet complete, direct labor costs incurred, factory overhead incurred c. Finished goods inventory: Manufactured goods that are complete and ready for sale 4. Manufacturing Process a. Direct labor refers to the earnings of employees who work on the products being manufactured b. Factory overhead refers to manufacturing costs that are not raw material or direct labor costs • Ex: factory supervisor’s salary, utility costs to operate the factory B. Inventory Tracking and Costs 1. Perpetual Method a. A detailed inventory record that is maintained by the company b. Records each purchase and sale during the accounting period in real time c. Companies that sell high dollar value items tend to prefer the perpetual method • E.g. jeweler, computer company, car company d. Purchases: Dr. Inventory, Cr. Cash or A/P e. Sales: Dr. Cash or A/R, Cr. Revenue, then Dr. COGS and Cr. Inventory 2. Periodic Method a. Ending inventory and cost of goods sold are determined at the end of the accounting period based on physical count • During the fiscal period only record revenue from sale, no COGS or inventory journal entries • At the end of period calculate the ending inventory and COGS b. Uses multiple temporary accounts which are closed into inventory at the end of the reporting period • Temporary accounts include Purchases, Freight-in, Purchase Discounts, and Purchase Returns c. Companies that have homogenous inventory that is not likely to be highly valuable in small quantities are more likely to prefer the periodic method • E.g., aluminum manufacturer, gravel pit d. Purchase: Dr. Purchase, Cr. Cash or A/P e. Sale: Dr. Cash or A/R, Cr. Revenue f. Process: • Record all purchases, freight in, discounts, and returns and allowances during period (use only these 4 temporary accounts) • Close all to purchases • Close purchases to inventory • Use beginning inventory + change in inventory – COGS = final inventory (find the new COGS) 3. Inventory Costs a. All costs that are incurred to get the inventory ready for sale are included in inventory • E.g., freight charges, inspection costs, preparation costs • COGS is included and FOB shipping point is included b. Costs that are not directly related to manufacturing or getting the inventory ready for sale are not included in inventory • E.g., marketing department salaries, administration expenses • FOB destination is not included c. Change in inventory = purchases (Dr.) + shipping (Dr.) – discounts (Cr.) – returns (Cr.) 4. Ratios COGS (beg+end ) a. Inventory turnover ratio = (avg inventory = inv) average inventory 2 • Interpret as how many times the average inventory was produced and sold during the period • Want COGS high and average inventory low • High turnover ratio is good 365 b. Average days to sell inventory = inventory turnover • Int
More Less

Related notes for Accounting ACCT 2610

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.