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23 Cards in this Set
- Front
- Back
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Three Methods of Inventory Costing |
Specific Identification FIFO Average Cost |
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Specific Identification |
Track cost of EVERY unity Can determine actual cost of inventory on hand Only used if individual units differ from each other |
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Example of Specific Identification |
Buy 4 units for 1, 2 5, and 4 dollars Sell the 4, 5 and 2 units during period COGS = 4+5+ 2 = 11 Ending inventory : 1 unit @ 1$ |
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FIFO |
Assumption that you sell oldest items first Need to keep track of purhcase prices In periods of rising prices, compared to average cost Lower COGS (selling older, cheaper units) Higher profits (because of lower COGS) Gives more representative ending inventory cost as it reflects latest purchase cost |
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Example of FIFO |
Buy 4 units at 1, 2 ,5, 4 Sell 3 units 1 + 2 + 5 = 8 because selling oldest inventory first Ending inventory: 1 unit at $4 because sold the oldest four units and left with the last purchased inventory |
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Average Cost Inventory - MOST COMMONLY USED |
Assume that all inventory purchases go into a pool and each unit has an average cost Only need to keep track of total inventory quantity and value In period of rising prices, compared to fifo - Higher COGS ( average cost incorporates newer units) - Lower profits - Lower ending inventory |
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example of Average Cost Inventory |
buy 4 units of inventory at 1, 2 ,5 ,4 sell 3 units
Average cost of inventory before sale (1+2+5+4)/4 = 3 COGS = 3*$3 = $9 Ending inventory : 1 unit @ $3 - equal to average cost |
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NRV = Net realizable value |
Selling price less any costs to make ready for sale |
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Inventory turnover = COGS / Average Inventory |
Average inventory = (Beginning / ending) / 2 Shows how many times you sell your inventory per year The higher number the better |
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Days in inventory |
365 days/ inventory turnover - Derivative of inventory turnover - Shows how many days it takes to sell your inventory - the lower number the better |
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Components of internal Systems |
Control Environment Risk of Assesment Control Activities Information and Communication Monitoring |
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Control Activities |
Authorization of transaction - Only one person is authorised to perform a specific task Segregation of duties - Responsibility must be assigned to different ppl - i.e somebody must check all employee - friend sales Documentation Every transaction should be recorded |
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Limitations of Internal Control |
Cost of control - may be greater than risk Humans may be lazy Collusion - two employees collude, can bypass checks |
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Cash Control |
Cash is easy to steal Money on hand or in BANK |
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Managing Cash |
Increase Collection of recievables - Offer invoice discounts -Make them prepay for sales Lower inventory levels - Only carry the amount of inventory that you NEED to sell to customers -Holding to much takes up cash Delay Payment of liabilities
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3 types of control |
Accounts Recieveable Notes recievable Other Recievables |
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Accounts Recieveables |
Amounts owed by customers Recorded when service is provided or goods at Point of sale |
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Notes recievable |
Formal credit instrument (written promise to pay) Similar to a bank lending money |
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Other Recievables |
Interest receivable, loans and advances to employees, recovered sales tax, income tax recievable |
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Evaluating Liquidity of Recievables |
Recievables Turnover Average Collection Period |
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Recievables Turnover |
Net credit sales/ Average accounts recievable HIGHER IS BETTER |
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Average Collection period |
365/ Recievable turnover LOWER IS BETTER |
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Current Ratio |
Total Current Assets / Total Current Liabilities |
