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)