Financial Accounting Exam 2: Chapter 7 Terms

LIFO & FIFO

1. Have opposite effects on the inventory - When prices are falling, the ending inventory on the balance sheet will be higher under LIFO than FIFO 2. Affect income statement in two ways: the amount of cost of goods sold and income/gross profit 3. LIFO has a lower taxable income versus FIFO

Characteristics of inventory

1. Often one of the largest assets → is a significant amount of a business' resources - On the other hand, if inventory is too low it may result in lost sales 2. Used up inventory = cost of goods sold 3. Inventory includes all goods that the company owns, regardless of location.... EXCEPT for consignment goods 4. The cost principle governs the measurement of the ending inventory amount 5. Goods available for sale = beginning inventory and the amount of goods purchased 6. Ending inventory of one period becomes the beginning inventory of the next

Purchases discount

Example: buy in bulk from one company and ask for a discount

Lifo liquidation

It occurs when a company that uses the last-in, first-out (LIFO) inventory costing method liquidates its older LIFO inventory can distort a company's net operating income, which generally leads to higher taxable income

merchandise inventory

The goods a business has on hand for sale to customers

Average cost

average of beginning inventory plus purchases Cost #1 + Cost #2 = X divided by 2 This is a periodic inventory system method

Periodic method, old school

beg inventory + purchases - ending inventory = cost of goods sold Don't need to know the date of each sale Ending inventory is calculated by physical count of remaining goods

Cost of goods sold equation

beginning inventory + net purchases - ending inventory = CGS

Goods available for sale

beginning inventory + purchases... net = cost of goods available

FIFO

first in, first out Cost of goods sold is costed at the oldest unit costs, ending inventory is costed at the newest unit costs Example: products with a shelf life Government prefers this because there are more taxes highest profit, highest taxes, highest inventory, less desired cash flow (more taxes)

Direct labor

included in cost of inventory → who's making it

LCM (lower cost market)

is applied when market is lower than the cost of units on hand The effect of applying LCM is to include the holding loss on the income statement in the period in which the replacement cost drops below cost rather than in the period of actual sale (have to readjust if it drops below market)

LIFO

last in, first out Cost of goods sold is costed at the newest unit costs, the ending inventory is costed at the oldest unit costs Example: material goods, like technology lowest profit, lowest taxes, lowest inventory, most desired cash flow (less taxes)

Finished goods inventory

manufactured goods ready to be sold

Inventory:

materials in store

Raw material inventory

materials of a later created product

Lifo reserve

measures the difference between (FIFO) and (LIFO) cost of inventory for bookkeeping purposes

purchases returns

merchandise a buyer acquires but then returns to the seller

Specific identification

method that requires each item to be marked (often a code) with a cost When it is sold, that unit cost is the cost of goods sold amount "Pick and choose" method When ending inventory is taken, the specific items on hand, valued at the cost indicated on them, is the ending inventory amount

Perpetual method

scanning method

Net realizable value:

selling price - cost of distribution

Factor overhead

the rental of the facility: light, a supervisor salary, etc.