Perpetual Inventory method: A detailed inventory system in which a company maintains the cost of each inventory item, and the records
continuously show the inventory that should be on hand.
Periodic Inventory method: An inventory system in which a company does not maintain detailed records of goods on hand throughout the period
and determines the cost of goods sold only at the end of an accounting period.
FOB delivery terms:
o FOB destination Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.
o FOB shipping point Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the
goods from the seller.
Inventory is always a current asset! Types of Inventory in a Manufacturing Company are raw materials, work in progress, and finished goods, in
a Merchandising Company there is only one type being Merchandise Inventory.
Purposes of Internal Control include: to safeguard assets, to enhance accuracy and reliability of accounting records, to increase efficiency of
operations, and to ensure compliance with laws and regulations. There are five components of Internal control: 1) Control environment, 2) Risk
Assessment, 3) Control Activities, 4) Information and Communication, 5) Monitoring.
Principles of Internal Control Activities: Establishment of responsibility- requires limiting access only to authorized personnel, and
then identifying those personal, having one person responsible for certain tasks. Segregation of Duties- Different people for related activities;
responsibility for record-keeping for an asset should be separate from physical custody of that asset. Documentation Produces- Companies
using pre-number documents and invoices so everything is accounted for. Physical Controls- Using safes, vaults, etc. for cash and important
documents, Locked warehouses, storage cabinets, stores, Computer system with passkey or scanning access, Alarm system to prevent break-ins,
Sensors on items to stop theft, and Time clocks for employee records. Independent Internal Verification- Records periodically verified by an
employee who is independent from task, etc., said person is to find discrepancies. Human Resources Controls- Bond employees who handle
cash, rotate employees’ duties and require vacation time, and conduct background checks before hand.
Consignment: Companies would hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the
goods. For example- used car dealership, the dealer puts them on his lot and would charge the seller a fee for a sale since it is on his lot but, they
ownership of the car would still belong to the seller, and it would not be include in the dealer’s inventory (debit cash, and credit accounts
payable).
Account for returned goods: Sales returns and allowances Transactions in which the seller either accepts goods back from the purchaser (a
return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods. Image of Journal Entire on front, Ex.
Notes: PW Audio Supply's entries to record credit for returned goods involve (1) an increase (debit) in Sales Returns and Allowances (a contra
account to Sales Revenue) and a decrease (credit) in Accounts Receivable at the $300 selling price, and (2) an increase (debit) in Inventory
(assume a $140 cost) and a decrease (credit) in Cost of Goods Sold, as shown below (assuming that the goods were not defective). Sales Returns
and Allowances is a contra revenue account to Sales Revenue.
Bank reconciliation process: Reconciling the Bank Account: reconcile the balance per books and balance per bank to their “correct or true”
balance. Reconciling items due to time lags (deposits in transit, outstanding checks and bank memoranda) and due to errors.
LCNRV: Lower of Cost or Net Realizable Value. When the value of inventory is lower than its cost, companies must “write down” the inventory
to its net realizable value. LCNRV is an example of the accounting concept of conservatism, which means that the best choice among accounting
alternatives is the method that is least likely to overstate assets and net income. Critics of accounting conservatism argue that it introduces bias
into accounting numbers. This can reduce the representational faithfulness as well as relevance of financial reports. Net realizable Value refers to
the net amount that a company expects to realize (receive) from the sale of inventory. Specifically, net realizable value is the estimated selling
price in the normal course of business, less estimated costs to complete and sell. Applied after inventory costing methods.
Gross Profit %: A company's gross profit may be expressed as a percentage by dividing the amount of gross profit by net sales. Analysts
generally consider the gross profit rate to be more informative than the gross profit amount because it expresses a more meaningful (qualitative)
relationship between gross profit and net sales (equation on front).
Profit Margin %: The profit margin measures the percentage of each dollar of sales that results in net income. We compute this ratio by dividing
net income by net sales (revenue) for the period. How do the gross profit rate and profit margin differ? The margin by which selling price
exceeds cost of goods sold. The profit margin measures the extent by which selling price covers all expenses (including cost of goods sold).
A company can improve its profit margin by either increasing its gross profit rate and/or by controlling its operating expenses and other costs
(equation on front).
FIFO: First- in, First-Out Method assumes that the earliest goods purchased are the first to be sold. Parallels the actual physical flow of
merchandise. Under FIFO, the costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold. (This does
not necessarily mean that the oldest units are sold first, but that the costs of the oldest units are recognized first.
LIFO: Last-in, First-Out Method assumes that the latest goods purchased are the first to be sold. LIFO seldom coincides with the actual
physical flow of inventory. (Exceptions include goods stored in piles, such as coal or hay, where goods are removed from the top of the pile as
they are sold.) Under the LIFO method, the costs of the latest goods purchased are the first to be recognized in determining cost of goods sold.
Average Cost: allocates the cost of goods available for sale on the basis of the weighted-average unit cost incurred. Applies weighted-average
unit cost to units on hand to determine cost of ending inventory.
Relation of Inventory and Net Income: No matter if you use FIFO, LIFO, or Average Cost the amounts will catch up to one another, they do
NOT go away.
Sarbanes-Oxley: Under SOX, all publicly traded U.S. corporations are required to maintain an adequate system of internal control. Corporate
executives and boards of directors must ensure that these controls are reliable and effective. In addition, independent outside auditors must attest
to the adequacy of the internal control system. Companies that fail to comply are subject to fines, and company officers can be imprisoned. SOX
also created the Public Company Accounting Oversight Board (PCAOB) to establish auditing standards and regulate auditor activity.