Chapter 7 AC 210

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10. It purchased 3 more at $12. It sold 4 units during the period. What is the Cost of Goods Sold using the weighted average cost method?

44.80 ???

LIFO

Last in first out typically for taxes lower taxable income, must be on financial statements Cant change but not constantly declining costs, results in higher EI, lower COGS, andlower GP due to grabbing most expensive units first

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs? (Check all that apply.)

Lifo Fifo

2 types of inventory

merchandisers and manufacturers

Companies generally report their accounting method for inventory in the ______.

notes to financ. state.

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 7 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 2 quilts remained unsold. If Mountain Made uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

3 * 200 + 7 * 210 / 10 * 8

Days to Sell

365 / ITR shows number of says the average inventory is sold

COGS

BBINV + P -ENDINV

Net Realizable Value

Companies using fifo and weighted average must compare their nrv

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received?

FIFO

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

If a company fails to record the write down, how does this affect their financial statements?

Flawed overstated inventory, net income would be overstated , and on IS and BS would be overstated.

Reporting inventory and COGS

Inventory = bs,current asset -Goods are recorded in inventory at cost when goods are sold, inventory is removed and cogs is reported as expense

companies using lifo compare cost to

Market Value

GP

Net sales revenue - cogs on income statement

Consignment Inventory

Not theirs, goods a company is holding on your behalf (platos closet)

3 Goals for Inventory Management

Quantity Quality Cost

Weighted Average

Total Cost of Purchases / Total Units COGS = units sold * average END INV = Total units - units sold

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, the 3 goods sold are assumed to be

beginning inv

Lower of Market Value Cost (replacement cost)

cost to replace an inventory item in its identical form in current market conditions (iphone 5)

Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross Profit

decreases

Removing off books when value decreases

dr. Cogs (loss of inv) Cr inventory

FIFO

first on books, first to come out during rising costs, results in higher ending inventory and lower cogs, gp DR. COGS Cr Inventory

When costs to purchase inventory are rising, using LIFO leads to reporting a ______ than FIFO.

lower value for Inventory on the balance sheet

Net Realizable Value (amount youll likely sell it for)

selling price - selling costs

On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under the specificBlank 1Blank 1 specific , Correct Unavailable identificationBlank 2Blank 2 identification , Correct Unavailable inventory method, cost of goods sold would equal $65.

specific identification

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Lux Company started the month with 20 lamps in its beginning inventory that cost $30 each. During the month, Lux purchased 80 additional lamps for $31 each. At the end of the month, Lux counted its inventory and found that 25 lamps remained unsold. If Lux uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

$2,310 20*30 + 80*31/100 = 30.80 = avg. average cost = 100-25 = 75 75 * 30.80 = 2310

Inventory Turnover Ratio

COGS / Average Inventory (BBINV+ENDINV)/2 The number of times a firm sells its avg inventory balance during a period. A higher ratio indicates that inventory moves more quickly from purchase -add cogs / bbinv -endinv / average THEN 365 / #

Calculating COGS and ENDING INV and GP for FIFO

COGS-first units until equal to items sold, multiply to prices and add them together END INV - rest of the inventory not in cogs and add them together GP = net sales - cogs total purchases - cogs

Most common mistake

Companies cant sell products, so the most common fraud is not reporting LCM/NRV

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

What effect does the inventory costing method have on the income statement? The inventory methods affects the amount of the ______.

Cost of Goods Sold, Gross Profit, Income from Operations, Income before Income Tax Expense, Income Tax Expense and Net Income

Write Down per Item Total Write Down

if cost is greater than value , write down per item is the difference total write down is the difference * quantity If cost is less than value, no write down per item, and no total write down . Increases COGS, Income Tax Expense Decreases, Net Income Decreases Write down JE Dr. COGS Cr. Inventory

At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. Market values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at ______.

1000 200*1 + 100*8

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.

302

Manufacturing

Companies purchase raw materials and produce and sell finished goods

Beta Company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is ______.

(80 * 12) + (20 * 12.50) / 100

Which inventory costing method uses the newest cost for Cost of Goods Sold on the income statement and the oldest cost for Inventory on the balance sheet?

LIFO

Merchandise Inventory

items in finished condition to re sell to customers

Work in Progress

items in process of being manufactured

Raw Material

items that will become part of a finished product

Goods in Transit

inventory items being transported

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest;newest