AC Chapter 7
Under GAAP, any of the 4 generally accepted methods can be used to ?
allocate cost of inventory available for sale bt goods that are sold and goods that remain on hand at end of accounting period
merchandise inventory
bought by merchandisers in a ready-to-sell format -finished condition and ready to sell without further processing
goods placed in inventory are initially recorded at ?
cost
inventory turnover ratio formula
cost of goods sold/ average inventory - tells number of times inventory turns over during the period - higher ratio means faster turnover
First in, first out (FIFO)
costs first in are assigned to cost of goods sold and the costs last in (most recent) are assigned to the inventory that is still on hand in ending inventory (assumes costs of first goods purchased are costs of first goods sold)
Last in, First out (LIFO)
costs last in are assigned to costs of goods sold and the costs first in (oldest) are assigned to inventory that is still on hand in ending inventory (assumes the costs of the last goods purchases are the costs of the first good sold)
the LCM rule ensures
inventory assets are not reported at more than they are worth
the costs remaining in inventory at the end of a period become ?
inventory at the beginning of the next period
Specific identification
inventory costing method that identifies the cost of the specific item that was sold
goods in transit
inventory items being transported
a change in method is only allowed if :
it improves the accuracy of the company's financial results.
when costs are falling, FIFO produced ?
lower ending inventory value and higher cost of goods sold
inventory turnover ratio
measures efficiency of inventory management -refects how many times average inventory is acquired and sold during the period
inventory turnover
process of buying and selling inventory
the cost of goods sold are removed from ? and ?
removed from inventory account and reported as an expense called cost of goods sold on the income statement
if ending inventory is overstated, then assets will be ? CGS will be ? net income will be ? and stockholders equity will be ?
-assets will be overstated -CGS will be understated -Net income overstated -SE will be overstated
raw materials inventory
-plastic steel or fabrics that become work in progress inventor when they enter the production process
primary goals of inventory managers
1. maintain a sufficient QUANTITY of inventory to meet customer's needs 2. ensure inventory QUALITY meets customers expectations and company standards 3. minimize COST of acquiring and carrying inventory -in order to earn desired amount of gross profit
Days to sell formula
365/ inventory turnover ratio - tells the average number of days from purchase to sell - higher number means longer time to sell
Coachlight Inc. has a periodic inventory system. The company purchased 265 units of inventory at $15.50 per unit and 430 units at $16.50 per unit. What is the weighted average unit cost for these purchases of inventory?
= ($265 x $15.50) + ($430 x $16.50) / (265 units + 430 units) = $16.12 per unit
perpetual updating formula:
BI + P - CGS = Ending I
periodic updating formula:
BI + P - EI = COGS
when costs are rising, ? provides a higher inventory value and a lower cost of goods sold
FIFO
LIFO is not allowed under the ?
International Financial Reporting Standards (IFRS)
At year end, CurlZ, Inc.'s inventory consists of 270 bottles of CleanZ at $2 per bottle and 170 boxes of DyeZ at $14 per box. Market values are $2.30 per bottle for CleanZ and $12 per box for DyeZ. CurlZ should report its inventory at:
Total lower of cost or market = Lower of cost or market per unit × Number of units in inventory = ($2 × 270 units) + ($12 × 170 units) = $2,580
Lower of cost or market (LCM)
a valuation rule that requires inventory be written down when its market value falls below its cost
goods in transit are reported on?
balance sheet of the OWNER not the company transporting it
consignment inventory
goods a company is holding on behalf of the goods owner -usually when company is welling to sell for the owner but does not want ownership of the goods in case they are difficult to sell
work in progress inventory
goods that are in the process of being manufactured
when faced with increasing costs per unit, a company that uses FIFO will ?
have a higher income tax expense
the costs of goods purchased are added to ?
inventory (on the balance sheet)
consignment inventory is reported on ?
the balance sheet of the OWNER not the company
weighted average cost formula
cost of goods available for sale / # of units available for sale
King Costume uses a periodic inventory system. The company started the month with 6 masks in its beginning inventory that cost $8 each. During the month, King Costume purchased 41 additional masks for $10 each. At the end of the month, King counted its inventory and found that 3 masks remained unsold. Using the LIFO method, its cost of goods sold for the month is:
434 (10 X 41) + (3 X 8)
Eaton Electronics uses a periodic inventory system. On March 31, Eaton has two plasma TVs on hand at a cost of $1,900 each (serial numbers 11534892 and 11534894). In April, the company purchases four more identical TVs from Toshiba for $1,650 each (serial numbers 11542631 through 11542634). In May, the company purchases five more identical TVs for $2,000 each (serial numbers 11550964 through 11550968). In June, Eaton sells two of these TVs (serial numbers 11534894 and 11542631). There were no additional purchases or sales during the remainder of the year. Eaton Electronics uses the specific identification method. What is its cost of goods sold?
CGS = 3550
The Acme Corporation starts the year with a beginning inventory of 310 units at $6 per unit. The company purchases 505 units at $5 each in February and 220 units at $7 each in October. Acme sells 155 units during the year. Acme has a periodic inventory system and uses the FIFO inventory costing method. What is the amount of cost of goods sold?
since 310 units were in the beginning inventory and we only sold 155 during the sold, we use the $6 per unit cost of the beginning inventory units to calculate cost of goods sold. Cost of goods sold = 155 units x $6 per unit = $930
weighted average cost
weighted average cost per unit of inventory is assigned equally to goods sold and those still on hand in ending inventory (uses weighted average unit cost of the goods available for sale for both costs of goods sold and ending inventory)
