Accounting 7

Replacement cost

current purchased price for the identical goods.

When merchandise is purchased the merchandise inventory account is....

increased

LIFO reserve

a contra-asset for the excess FIFO over LIFO inventory

When the goods are sold, cost of goods sold is _____ and merchandise inventory is ______

increased, decreased.

Finished goods inventory

manufactured goods that are complete and ready for sale (manufacturing)

Factory overhead

are manufacturing costs that are not raw materials or direct labor costs.

Raw materials is also known as...

direct materials

Work in process inventory

goods in the process of being manufactured (manufacturing)

What are the three stages of inventory costs?

1. Purchasing/Production activities 2. Additions to inventory on the balance sheet 3. sale cost of goods sold on income statement

Inventory Costing Methods

1. Specific Identification 2. First in, first out (FIFO) 3. last in, first out (LIFO) 4, Average cost

Cost of goods sold equation

BI + P -EI = CGS Beginning Inventory + Purchases - ending inventory = cost of goods sold. Goods available for sale - EI = CGS

Equation of difference in cost of goods sold under FIFO

Beginning LIFO Reserve (Excess of FIFO over LIFO) - Ending LIFO reserve (Excess of FIFO over LIFO = difference in cost of goods sold under FIFO

LIFO

assumes that the most recently purchased unite are sold first

Ending inventory (______) Cost of goods sold (______) Where?

balance sheet, income statement.

Flow of inventory costs (merchandise)

Merchandise purchased...Merchandise inventory...Cost of goods sold

Flow of inventory costs (manufactured)

Raw materials purchased, direct labor, factory overhead...raw materials, work in process, finished goods...costs of goods sold.

Costs included in Inventory purchases

The cost principle requires that inventory be recorded at the price paid or the consideration given. Invoice Price. Freight (transportation). Inspections Cost. Preparations Cost.

inventory turnover

cost of good sold / average inventory

Specific identification

identifies the cost of the specific item that was sold. Requires keeping track of purchase cost of each item. Done by coding the purchase or keeping a separate record.

Raw materials inventory

includes items acquired for the purpose of processing into finished goods. (manufacturing)

Inventory

tangible property held for sale in the normal course of business or used in producing goods or services for sale (reported on the balance sheet as a current asset because it is converted into cash within a year)

Average cost method

the weighted average unit of cost of the goods available for sale for both cost of goods sold for the ending inventory.

Lower of cost or Market (LCM)

valuation method departing from the cost principle; serves to recognize a loss when replacement cost or net realizable value drops below cost.

Difference in tax under FIFO

Differ in pretax income under FIFO * tax rate

Cost of goods sold is directly related to _____.

Sales revenue (<<< during an accounting period is the # of unites sold multiplied by the sales price) Cost of goods sold is the same # of unites multiplied by their unit costs.

FIFO

assumes that the first good purchased (the first in_ are the first goods sold.

Goods Available for sales

the sum of the beginning inventory and purchases.

Merchandise inventory

(wholesale or retail business)...Includes goods held for resale in the ordinary course of business

Direct Labor

refers to the earnings of employees who work directly on the products being manufactured