Chapter 7: Investment Management

King costumers started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King costumer purchases 40 additional mask for $12 each. At the end of the month, King counted its inventory and found 5 masks remained unsold. If King costume uses LIFO periodic, its cost of goods sold for the month is =

$510 (the cost of 43 masks sold equals 40 masks x 12 + 3 masks x 10, and ending inventor equals 5 remaining masks at 10 each or $50)

what does inventory ratio tell you?

- the number of times inventory turns over during the period -a higher ratio means faster turnover

what does days to sell tell you?

-average number of days from purchase to sale -a higher number means a longer time to sell

days to sell =

365/ inventory turnover ratio

these methods are based on ___________ accountants make about the flow of inventory cost

assumptions

FIFO periodic

beg. inventory+ purchases = goods available for sale - ending inventory = COGS

goods available for sale

beginning inventory + purchases =

fifo perpetual =

beginning inventory + purchases =goods available for sale- COGS = ending inventory

cost of goods sold =

beginning purchases + available ending inventory

ending inventory=

beginning purchases + available goods sold

refers to goods a company is holding on behalf of the good's owners.

consignment inventory

weighted average cost

cost of goods available for sale/number of units available for sale

inventory turn over equation

cost of goods sold/average inventory

the cost of older goods, include those in beginning inventory, are included in the cost of

ending inventory

the cost of the newer goods are included in the cost of the ________ _______

ending inventory

usually a company with lower gross profit percentage has a

faster inventor turnover

when completed, work in process inventory becomes

finished good inventory

a sudden decline in the inventory turnover ratio may signal an unexpected drop

in demand for a company product or sloppy inventor management

___________ means goods that are held for sale in the normal course of business or are used to produce goods for sale

inventory

the process of buying and selling is called

inventory turnover

if a company were to ignore the fact that the market value of its inventory is lower than its cost, then

its assets and stockholders equity will be overstated

the value of inventory can fall below its recorded cost for two reasons:

its easily replaced by identical goods at a lower cost, or it becomes outdated or damaged

when cost to purchase inventory are falling over time, using LIFO leads to reporting _______, cost of goods sold and _____ net income than FIFO.

lower, higher

applying the lower cost or market rule results in inventory being reported at the

market value if lower than costs

consists of products acquired in a finished condition, ready for sale without further processing. (Will be sold later)

merchandise inventory

a higher inventory turnover ratio indicates that inventory moves

more quickly from purchase to sale (reducing storage and obsolescence cost)

if the cost is lower than the market value then a company should report

no entry

companies generally report their accounting method for inventory in the

notes to the financial statements

these three inventory costing methods are not bad on the

physical flow of goods (on and off the shelves)

plastic,steel or fabrics is considered what kind of inventory?

raw material

When costs are falling, these effects are reversed; FIFO produces a ________ ending inventory value and a _______ cost of goods sold

smaller, larger

__________ _________ is an inventory method typically used when accounting for expensive and unique inventory items

specific identification

___________ _________ method individually identifies and records the cost of each item sold at COGS.

specific identification

use the weighted average of the cost of goods available for sale for both the cost of each item sold and those remaining inventory.

weighted average cost

when raw materials enter the production process, they become part of ______ __ _________ inventory (included goods that are in the manufacturing process.)

work in progress

chicken little started the month with 5 eggs in its inventory that cost $2 each. during the month, chicken little bought 30 more eggs that cost $2.50 each. At the end of the month, chicken little counted its inventor and found that 8 eggs remained unsold. If chicken little uses FIFO periodic, its COGS sold for the month is

65 (since 8 eggs of the 35 eggs available to sell were left, then 27 were sold. 5 eggs x $2 + 22 eggs x2.50)

When costs are rising, as they were in our example, FIFO produces a larger inventory value (making the balance sheet ________ to be stronger) and a smaller cost of goods sold (resulting in a larger gross profit, which makes the company ____ more profitable).

APPEAR, LOOK

_____ dont differ between periodic and system

FIFO

assume the inventory costs flow out in the order the goods are received. (oldest goods, the first in inventory are the first ones sold)

FIFO (first-in,first-out)

assume the inventory costs flow out in opposite of the order goods are received.

LIFO (last-in,first out)

only _____ and _________ differ between periodic and perpetual inventory systems

LIFO and weighted average calculations