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