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ACCT-1001EL Study Guide - Final Guide: Consignor, Consignee, Current Asset

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Leslie Beaudoin
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Accounting Final Review
Chapter 7 - Inventory
What is Inventory?
Any item purchased by a company for real to customers or to be used in the
manufacturing of another product. All companies with the exception of service
businesses have an inventory. Permanent Account.
Difference between Merchandisers and Manufactures
Merchandisers — companies such as the bookstore or grocery store, they
purchase their inventory from publishers and food processors with the
objective of selling it to the consumer at a profit.
FOB Shipping Point(buyer owns inventory when it leaves sellers premises).
- responsible for payment of shipping, and any other costs.
- Included in the inventory of the buyer, even though it has not actually arrived.
FOB Destination(buyer owns inventory when it arrives at the buyers premises).
- seller is responsible for payment of shipping and any other costs.
- Buyer does not record the inventory until it arrives.
Manufacturers — companies that make the products the merchandisers sell.
Types: Raw-materials, Work in process, Finished Goods
Manufacturers Process:
1. Raw materials are purchased
2. Raw materials are used and incorporate into the manufacture of products. These
are work in process until the manufacturing process has been completed.
3. The manufacturing process is completed and the goods move from work-in-process
to finished goods.
4. The goods are sold and move from finished good to cost of goods sold.
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Significance of Inventory
Inventory is the largest current asset of a company, that will be converted to cash over
the next year. Most significant asset on a company statement of financial position. Each
company has its own processes for purchasing, selling and accounting for inventory.
Consignment — The other situation that needs to be considered in relation to
determining the ownership of goods held at the company premises. EX. Student (owner
or consignor, leaves textbook with store or company (consignee). When the book sells,
the company keeps its commission and gives the balance to the student.
Inventory Systems
COGAS — Cost of goods available for sale = Opening Inventory+Purchases
Periodic Inventory System
Perpetual Inventory System
-These systems are updated periodically
-Only when the company has physically
counted the inventory. Can be monthly,
quarterly or yearly.
-Do not know cost of inventory nor cost of
goods sold in the period.
-Easy to operate, but do not provide
management with up to date information
regarding inventory quantity or cost.
-Low start up fees, as no hardware/software
-These systems are perpetually or continuously
-Inventory and cost of goods sold are updated
after every purchase and transaction.
-2 subgroups — the tracking of physical product
but not price, and the use of barcodes to
completely track the inventory and costs.
-Manual counts are still done yearly, to assure
that the information in the system is correct.
-Inventory Shrinkage, also known as theft, is the
main reason for these numbers to differ.
Opening Inventory (last periods ending inventory)
+Purchases (Based on invoices during period).
Cost of goods available for sale (COGAS)
-Ending inventory (EI - based on physical
inventory counts).
Cost of goods sold(COGS) (goods not on hand
are assumed to be sold).
Opening Inventory (last periods ending inventory)
+Purchases (based on invoices during the
Cost of goods available for sale
-Cost of goods sold (updated after each sale)
Ending Inventory (inventory that should still be on
-Actual ending inventory per count
Shrinkage or Theft
-Assess importance of having frequent and
complete inventory information
-Identification of inventory shrinkage
-Costs associated with purchasing and
maintaining the inventory
-What is the benefit of having ready and
available information.
-Is the information required for pricing,
reordering, and other important business
decisions, the benefits may outweigh the costs.
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