Accounting Ch 5

During a period of regularly rising purchase costs, the method yields the highest reported cost of goods sold amount on the income statement

LIFO

Inventory items retained at the end of the period are considered _______ on the balance sheet

Merchandise inventory

Consignor

Owner of the goods

A business may adopt any cost of flow assumption when

accounting for perishable items

Physical flow is focused on

actual movement of goods

Inventory costs are labeled as ______ on the income statement

cost of goods sold

A loss in value of a damaged product is reported in the period when

goods are damaged or become obsolete

Goods in transit shipped by Abbey (seller) FOB destination

included in inventory count

FOB shipping point

the purchaser is responsible to pay

What kind of business would use the specific identification method of inventory costing

A car dealership

Consistency Concept

A company should use the same accounting methods period after period, so that financial statements are comparable

Assume that we use a perpetual inventory system and that five identical units are purchased separately at the following four dates and costs: April 5 at $10, April 10 at $12, April 15 at $14, and April 20 at $16 and at $17. One unit is then sold on April 25. The company uses the first-in, first-out (FIFO) inventory costing method. What date and price would go on the income statement?

April 5 at $10 - cost of goods sold

Cash flow

Assumption about which goods/items are sold

Other reasons why to use LCM

Companies never want to report inventory on a balance sheet that is higher than replacement cost; requires conservation when reporting financial statements; assets are not shown at an inflated value on the balance sheet, but a lower cost or replacement cost

X company made a mistake in its ending inventory. What is effected

Current assets, net income, cost of goods sold

Advantages to using a perpetual inventory system

Gross profit can be determined, inventory information is more timely, management can be notified more quickly of inventory shortages, inventory levels can be reduced with reduces costs

During a period of regularly rising purchase costs, the method yields the lowest income tax expense

LIFO

Consignee

Seller of the goods

When the recorded cost of inventory is higher than its replacement cost

a loss must be recognized

If a perpetual inventory system is in use

a physical inventory count should be taken at least annually

Physical inventory count

adjust the inventory account balance to the actual inventory available;m determine if there is any theft, loss, errors in inventory

LCM

allows companies to recognize a loss in value of an asset in the period the loss occurs

Perishable items must have

an actual physical flow of FIFO

Advantage of LIFO

assigns an amount to cost of goods sold on the income statement that approximates its current cost; it also better matches current costs with revenues in computing gross profit

Advantage of FIFO

assigns an amount to inventory on the balance sheet that approximates its current cost; it also mimics the actual flow of goods for most businesses

FIFO

assumes costs flow in the order incurred

LIFO

assumes costs flow in the reverse order incurred

Weighted average cost of goods sold will be

between FIFO and LIFO costs of goods sold

A company overstated its ending inventory for Year 1. If the error was not detected, equity would be _____ for Year 2

correctly stated

Relationship between ending inventory and beginning inventory

ending inventory of the previous period is the beginning inventory of the current period

Why would the physical count of inventory be different than what is shown in perpetual inventory records?

errors, theft, loss, damage

Advantage of Specific Identification

exactly matches the costs of items with the revenues they generate

Damaged inventory that cannot be resold

excluded in inventory count

Goods in transit shipped by Abbey (seller) FOB shipping point

excluded in inventory count

FIFO has the highest

gross profit and net income

Companies choose LIFO inventory costing during periods of rising purchase costs between reported cost of goods sold will be ______. This causes taxes to be _________

higher; lower

Goods in transit shipped to Abbey (purchaser) FOB shipping point

included in inventory count

Goods on consignment (Abbey is consignor)

included in inventory count

Obsolete inventory that can be sold

included in inventory count

What costs would be included in cost of merchandise inventory

insurance, storage, invoice

FIFO assigned an amount to

inventory on the balance sheet that approximates its current cost

Safeguards that companies implement to protect their inventory

match inventory received with purchase orders, restrict access to inventory, security camera, insure against loss or damage, control access to inventory records

When the recorded cost is lower

no adjustment needs to be made

A company overstated its ending inventory at the end of Year 1. If the error was not detected, cost of goods sold would be _____ for Year 2

overstated

A company overstated its ending inventory for Year 1. If the error was not detected, equity would be _____ for Year 1

overstated

A company overstated its ending inventory for Year 1. If the error was not detected, total assets would be _____ for Year 1

overstated

Companies using FIFO will

pay more taxes than LIFO

consistency concept

prescribes that a company use the same accounting methods period after period so that financial statements are comparable across periods

full-disclosure principle

prescribes that the notes to the statements report the change, its justification, and its effect on income

Advantage to weighted average

smooth out erratic changes in cost

Advantage of Weighted Average

tends to smooth out erratic changes in costs

When the lower of cost or market rule is applied to individual items of inventory

the number of comparisons equals the number of items

Damaged goods are not included in inventory when

they cannot be sold

A company overstated its ending inventory at the end of Year 1. If the error was not detected, cost of goods sold would be _____ for Year 1

understated

A company overstated its ending inventory at the end of Year 1. If the error was not detected, net income would be _____ for Year 2

understated

If damaged goods can be sold at a reduced price is it included in inventory?

yes

Is Consigned goods included in consignor's inventory?

yes

An item was shipped from a supplier under FOB shipping point. The invoice in the amount of $2,000 included payment terms of 2/10, n/30. When the invoice was paid, a purchase discount in the amount of $40 was taken. Other details relating to the purchase of this item included the following: freight charges of $300, import duties of $50, and insurance premium of $100. The cost of this inventory item is _____.

$2,410

Weighted average cost flow assumption

Costs flow at an average of costs available

During a period of steadily rising costs, the method results in the highest amount of inventory reported on the balance sheet

FIFO

What are the steps that apply LCM to individual items of inventory

List the number of units of each product list the cost of each item list the market price of each item compute the total cost and total market value for each item compare recorded cost of each inventory item with its replacement adjust inventory downward when market is less than cost

What are way that lower of cost or market can be applied to merchandise inventory

Major categories of items, each item individually, inventory as a whole

Full-disclosure principle

Prescribes that the notes to the financial statements describe the change, its justification and its effect on income

Weighted average

assumes costs flow at an average of the costs available

How are damaged goods included in inventory

by their net realizable value

A company overstated its ending inventory for Year 1. If the error was not detected, total assets would be _____ for Year 2

correctly stated

Beginning inventory + Net purchases - ending inventory =

cost of goods sold

FIFO has the smallest

cost of goods sold

Cost of goods available for sale must be allocated between

cost of goods sold and ending inventory

After assigning costs to its ending inventory using the FIFO method, a company's Merchandise Inventory account showed a total cost of $300,000. When the company applied the lower of cost or market rule to the individual items of inventory, it determined that the market value (replacement cost) of its inventory totaled $295,000. The entry, if any, to adjust the cost of its inventory to market includes a _____

debit for $5,000 to the Cost of Goods Sold account

Goods in transit shipped to Abbey (purchaser) FOB Destination

excluded in inventory count

Goods on consignment (Abbey is consignee)

excluded in inventory count

Inventory costs are treated as ________ when they are sold

expenses

Cost of goods sold + ending inventory =

total goods available for sale