AKM 1: 5-4 Goods and costs included in inventory

Summary

This video script covers essential concepts in inventory accounting, focusing on when and how inventory should be recognized. It addresses transit goods, consignment inventory, and the costs associated with inventory management, such as product and period costs. The video also explains the distinction between gross and net methods in purchase discounts and the handling of consignment goods. Key takeaways include when companies should recognize inventory in transit and how inventory costs, including transportation and taxes, should be recorded. The content lays a strong foundation for understanding inventory recognition and valuation methods in accounting.

Takeaways

• 😀 Inventory in transit should be recognized as inventory if the company has legal ownership, depending on the terms of sale.
• 😀 FOB Shipping Point means the buyer owns the goods once they are shipped, and should recognize inventory even if the goods haven't arrived yet.
• 😀 FOB Destination means the seller owns the goods until they reach the buyer, and the buyer should not recognize inventory until the goods are received.
• 😀 Consignment inventory remains the property of the consignor, and the consignee cannot recognize it as inventory.
• 😀 Product costs, such as purchase price, transportation, and taxes, should be included in the inventory value.
• 😀 Period costs, such as administrative and marketing expenses, should not be included in the inventory value.
• 😀 Purchase discounts are handled using either the Gross Method or the Net Method for accounting purposes.
• 😀 The Gross Method records the full purchase amount, with any discount recorded separately when applicable.
• 😀 The Net Method assumes the discount is immediately taken, and the reduced amount is recorded as the value of the inventory.
• 😀 Inventory accounting involves understanding when inventory should be recognized, which costs to include, and how to handle purchase discounts.
• 😀 Consistency is key in applying either the Gross or Net method for accounting discounts across transactions.

Q & A

What is the focus of the session regarding inventory accounting?

The session focuses on understanding which types of transactions and costs can be recognized as inventory, and the legal rights associated with in-transit goods, consignment goods, and other related costs.

What is the main difference between the previous lesson and the current one regarding in-transit goods?

In the previous lesson, the focus was on inventory recording methods and transportation costs. The current lesson focuses on when in-transit goods can be recognized as inventory based on legal rights and sales/purchase terms.

When can in-transit goods be recognized as inventory?

In-transit goods can be recognized as inventory if the buyer has legal ownership of the goods, which is determined by the purchase or sales terms (FOB shipping point or FOB destination).

What happens when the goods are still in transit at the end of an accounting period?

If the goods are in transit at the end of the accounting period, the buyer may recognize them as inventory if they hold legal rights over the goods based on the purchase terms.

How does FOB shipping point affect the ownership of inventory?

Under FOB shipping point terms, the buyer takes ownership of the inventory as soon as the goods leave the seller's premises, meaning the buyer should recognize the goods as inventory, even if they haven't received them yet.

How does FOB destination affect the ownership of inventory?

Under FOB destination terms, the seller retains ownership until the goods reach the buyer's location, meaning the seller must recognize the goods as inventory until delivery is completed.

What is consignment inventory and how should it be recognized in accounting?

Consignment inventory refers to goods held by an agent (consignee) but owned by the consignor. The consignee should not recognize these goods as inventory because they do not have legal control over them. Only the consignor can recognize the goods as inventory.

What is the difference between product costs and period costs in inventory accounting?

Product costs are directly associated with acquiring or manufacturing inventory, such as purchase price, import taxes, and transportation costs. Period costs, on the other hand, are not directly tied to inventory and include expenses like marketing salaries and administrative costs.

How should purchase discounts be accounted for in inventory?

Purchase discounts are accounted for by either the gross method, where the full purchase price is recorded, or the net method, where the discounted amount is recorded. The net method is considered more accurate, as it reflects the actual amount the company expects to pay.

What is the impact of using the gross method vs the net method for recording purchase discounts?

The gross method records the full purchase price, while the net method assumes the discount is taken and records the lower purchase amount. The net method results in more accurate reporting of receivables and inventory but may require more careful tracking.