FAR 1 Chapter 8

Difference between perpetual and periodic for - return of merchandise

perpetual: credit inventory periodic: credit purchases return

Difference between perpetual and periodic for - sale of merchandise

perpetual: debit cogs, credit inventory periodic: no entry

For a periodic inventory: Indicate the effect (increase or decrease) of the following items on cost of goods sold: 1. Beginning inventory 2. Purchases 3. Ending inventory 4. Purchase returns 5. Freight-in

1. increase 2. increase 3. decrease 4. decrease 5. increase

Distinguish between the gross and net methods of accounting for purchase discounts

By the gross method, purchase discounts not taken are viewed as part of inventory cost. By the net method, purchase discounts not taken are considered interest expense because they are viewed as compensation to the seller for providing financing to the buyer.

Difference between perpetual and periodic for - purchase of inventory

perpetual: debit inventory periodic: debit purchases

What is a LIFO inventory pool? How is the cost of ending inventory determined when pools are used?

A LIFO inventory pool groups inventory units into pools based on physical similarities of the individual units. The average cost for all of a pool's beginning inventory and for all of a pool's purchases during the period is used instead of individual unit costs. If the quantity of ending inventory for the pool increases, then ending inventory will consist of the beginning inventory plus a layer added during the period at the average acquisition cost for the pool.

What is a consignment agreement? Explain the accounting treatment of goods held on consignment

A consignment is an arrangement under which goods are physically transferred to another company (the consignee), but the transferor (consignor) retains legal title. If the consignee can't find a buyer, the goods are returned to the consignor. Goods held on consignment are included in the inventory of the consignor until sold by the consignee.

The Austin Company uses the dollar-value LIFO inventory method with internally developed price indexes. Assume that ending inventory at year-end cost has been determined. Outline the remaining steps used in the dollar-value LIFO computations

After determining ending inventory at year-end cost, the following steps remain: 1. Convert ending inventory valued at year-end cost to base year cost. 2. Identify the layers in ending inventory with the years they were created. 3. Convert each layer's base year cost measurement to layer year cost measurement using the layer year's cost index and then sum the layers.

What is the main difference between a perpetual inventory system and a periodic inventory system

Beginning inventory plus net purchases for the period equals cost of goods available for sale. The main difference between a perpetual and a periodic system is that the periodic system allocates cost of goods available for sale to ending inventory and cost of goods sold only at the end of the period. The perpetual system accomplishes this allocation by decreasing inventory and increasing cost of goods sold each time goods are sold.

Identify four methods of assigning cost to ending inventory and cost of goods sold and briefly explain the difference in the methods

Four methods of assigning cost to ending inventory and cost of goods sold are (1) specific identification, (2) first-in, first-out (FIFO), (3) last-in, first-out (LIFO), and (4) average cost. The specific identification method requires each unit sold during the period or each unit on hand at the end of the period to be traced through the system and matched with its actual cost. First-in, first-out (FIFO) assumes that units sold are the first units purchased. The last-in, first-out (LIFO) method assumes that the units sold are the most recent units purchased. The average cost method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale. The average unit cost applied to goods sold or ending inventory is an average unit cost weighted by the number of units acquired at the various unit prices.

Describe the three types of inventory of a manufacturing company

Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and (3) finished goods. Raw materials represent the cost, primarily purchase price plus freight charges, of goods purchased from suppliers that will become part of the finished product. Work-in-process inventory represents the products that are not yet complete in the manufacturing process. The cost of work in process includes the cost of raw materials used in production, the cost of labor that can be directly traced to the goods in process, and an allocated portion of other manufacturing costs, called manufacturing overhead. When the manufacturing process is completed, these costs that have been accumulated in work in process are transferred to finished goods.

The Brockner Company shipped merchandise to Laetner Corporation on December 28, 2018. Laetner received the shipment on January 3, 2019. December 31 is the fiscal year-end for both companies. The merchandise was shipped fob shipping point. Explain the difference in the accounting treatment of the merchandise if the shipment had instead been designated fob destination

Inventory shipped f.o.b. shipping point is included in the inventory of the purchaser when the merchandise reaches the common carrier. Laetner Corporation records the purchase in 2018 and includes the shipment in its ending inventory. Bockner Company records the sale in 2018. Inventory shipped f.o.b. destination is included in the inventory of the seller until it reaches the purchaser's location. Bockner would include the merchandise in its 2018 ending inventory and the sale/purchase would be recorded in 2019.

Explain what is meant by the Internal Revenue Service conformity rule with respect to the inventory method choice

Many companies choose the LIFO inventory method to reduce income taxes in periods when prices are rising. In periods of rising prices, LIFO results in a higher cost of goods sold and therefore a lower net income than the other methods. The companies' income tax returns will report lower taxable incomes using LIFO and lower taxes will be paid currently. If a company uses LIFO to measure its taxable income, IRS regulations require that LIFO also be used to measure income reported to investors and creditors.

Explain the proponents of LIFO argue that it provides a better match of revenue and expenses. In what situation would it not provide a better match?

Proponents of LIFO argue that it provides a better match of revenues and expenses because cost of goods sold includes the costs of the most recent purchases. These are matched with sales that reflect a current selling price. On the other hand, inventory costs in the balance sheet generally are out of date because they are derived from old purchase transactions. It is conceivable that a company's LIFO inventory balance could be based on unit costs actually incurred several years earlier. When inventory quantity declines during a period, then these out-of-date inventory layers will be liquidated and cost of goods sold will match noncurrent costs with current selling prices.

Identify two advantages of dollar-value LIFO compared with unit LIFO

The dollar-value LIFO method has important advantages. First, it simplifies the recordkeeping procedures compared to unit LIFO because no information is needed about unit flows. Second, it minimizes the probability of the liquidation of LIFO inventory layers, even more so than the use of pools alone, through the aggregation of many types of inventory into larger pools. In addition, firms that do not replace units sold with new units of the same kind can use the method.

Describe the ratios used by financial analysts to monitor a company's investment in inventories

The gross profit, inventory turnover, and average days in inventory ratios are designed to monitor inventories. The gross profit ratio is calculated by dividing gross profit (net sales minus cost of goods sold) by net sales. Inventory turnover is calculated by dividing cost of goods sold by average inventory, and we compute average days in inventory by dividing the number of days in the period by the inventory turnover ratio.

Identify the differences between U.S. GAAP and International Financial Reporting Standards in the methods allowed to value inventory

The primary difference between U.S. GAAP and IFRS in the methods allowed to value inventory is that IFRS does not allow the use of the LIFO method.

It's common in the electronics industry for unit costs of raw materials inventories to decline over time. In this environment, explain the difference between LIFO and FIFO, in terms of the effect on income and financial position. Assume the inventory quantities remain the same for the period

When costs are declining, LIFO will result in a lower cost of goods sold and higher income than FIFO. This is because LIFO will include in cost of goods sold the most recently purchased lower-cost merchandise. LIFO also will provide a higher ending inventory in the balance sheet.

Difference between perpetual and periodic for - payment of freight

perpetual: debit inventory periodic: debit freight-in