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Week-6 and 7 : Inventory - Coggle Diagram

- - - - c) in the form of materials or supplies to be consumed in the production process or in the rendering of services (raw materials)
      - b) in the process of production for such sale (work in progress)
      - a )held for sale in the ordinary course of business (finished goods) . If it is within one year, it will be treated as Current Asset.
    - - Freight-in : When the buyer pays the transports costs, these costs are considered part of the cost of purchasing inventory and are called frieight in
      - Freight-out: In contrast, freight costs incurred by the seller on outgoing inventory are called freight-out and are an operating expense to the seller.
    - - Settlement Discounts : The buyers calls this settlement discount received. This incentive offers advantages to both parties- the purchaser saves money, and the seller is able to shorten the operating cycle by converting the accounts receivable into cash eariler.
      - Trade Discounts : Unlike settlement discounts, do not depend on early payment of the amount due and are not recorded in the records of either the buyer or the seller. Trade discounts are disclosed on the sales invoices as a percentage reduction in the list price of the inventories sold. Page 240
  - - - This is compared with the amount actually on hand to see if there is a stock loss/gain
      - Actual inventory on hand is determined by physical count
      - The amount of inventory that should be on hand is known at all times
      - COGS is updated at the time of every sale
      - A ledger account called Inventory (A) records all inflows and outflows of inventory at the time
      - A continuous record of all inventory transactions is maintaine
    - - Advantages
        
        Inventory is constantly updated every time a purchase or sale is made. This means that the accounting entity will be aware of when to reorder items of inventory.
        
        Cost of sales is updated every time a sale is made so interim financial statements can be prepared without having to conduct an inventory count
        
        When the accounting entity does conduct an inventory count( which should be at least annually) , any inventory losses can be accurately determined.
      - Disadvantages
- - - - (1)This method applied by entities on such inventories which are not ordinarily interchangeable
      - (2) Generally for small volume, high dollar value item.
      - (3) Specific identification tracks each individual items through the inventory flow
    - - The FIFO method assumes that the first goods purchased are the first to be sold.
    - - The LIFO method assumes that the last goods purchased are the first to be sold.
    - - The Average cost method allocates the cost of goods available for sale on the basis of the weighted average unit cost incurred.
  - - - Factors that may lead the NRV falling below to the cost of inventory
        
        Obsolete Inventory
        
        Customer changes in tates
        
        Pressure of competitors that necessitates a reduction in selling price
        
        Overdue retail