ACCT 351 Chapter 8
The (1) system allocates cost of goods available for sale between ending inventory and cost of goods sold at the end of the period. In contrast, the (2) performs this allocation by decreasing inventory and increasing cost of goods sold each time goods are sold.
1) periodic inventory system 2) perpetual inventory system
What are four cost flow assumptions?
1. Specific Identification 2. First-in, First Out (FIFO) 3. Last-in, First Out (LIFO) 4. Average cost
What are the two types of inventory?
1.) Merchandising inventory 2.) Manufacturing inventory
What are the two accounting systems that are used to record transactions involving inventory?
1.) Perpetual inventory System 2.) Periodic Inventory System
What three departments are needed for manufacturing inventories?
1.) Raw materials 2.) Work-in-process 3.) Finished goods
What does 2/10, n/30 mean?
2% discount if paid within 10 days, otherwise full payment within 30 days
Inventories consist of _____ that a retail or wholesale company acquire for resale of goods that manufacturers produce for sale.
Assets
The _____ method assumes that items sold and items in ending inventory come from a mixture of all the goods available for sale.
Average Cost Method or Weighted Average
Expenditures necessary to bring inventory to its condition and location for sale or use are included in its _____.
Cost
__________ (beginning inventory + purchases) are the same no matter which inventory cost flow assumption is used.
Cost of Goods Available for Sale
The inventory amount in the balance sheet represents the cost of the inventory still on hand (not yet sold) at the end of the period, while _________in the income statement represents the cost of the inventory sold during the period.
Cost of goods sold
_____ is the expense related to inventory.
Cost of goods sold
During periods of rising costs, (FIFO/LIFO) results in a lower cost of goods sold than LIFO because the lower costs of the earliest purchases are assumed sold.
FIFO
Ending inventory is most up-to-date (current) under FIFO/LIFO.
FIFO
The ending inventory and cost of goods sold will have the same amounts in a perpetual inventory system as in a periodic inventory system when (LIFO/FIFO) is used. This is because the same units and costs are first in and first out whether cost of goods sold is determined as each sale is made or at the end of the period as a residual amount.
FIFO
Companies will use LIFO Reserve account (a contra inventory account) to convert from FIFO/LIFO to FIFO/LIFO a the end of each reporting period.
FIFO to LIFO
IF costs are declining, then (FIFO/LIFO) will result in a higher cost of goods sold and lower ending inventory than (FIFO/LIFO).
FIFO, LIFO
Shipping cost incurred by the seller
FOB Destination
Shipping cost incurred by the buyer
FOB Shipping Point
(True/False) If freight-out is not included in COGS due to company policies, it doesn't have to be disclosed.
False
A company has to use the same inventory method for its entire inventory (true/false).
False
It is not necessary for ownership to be determined for goods that are in transit between the company and its customers as well as between the company and its suppliers (true/false)
False
A company does not have to disclose the inventory methods it uses (true/false).
False; a company has to disclose
The actual flow of a company's inventory has to match management's assumed flow (true/false).
False; it does not.
In the ____inventory system, a ______account is used instead of an inventory account.
Freight-in
GAAP/IFRS does not allow use of LIFO.
IFRS
Inventory
In order to acquire and/or produce items of inventory and to move them to the location from which they will be sold or held for sale, accumulated amounts of direct and indirect expenditures and charges incur in the process.
If unit costs are increasing/decreasing, LIFO will result in higher COGS and lower EI than FIFO.
Increasing
_____consist of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale
Inventories
_______ refers to the assets a company: (1) intends to sell in the normal course of business (2) has in production for future sale (3) uses currently in the production of goods to be sold
Inventory
A material effect on the net income due to FIFO/LIFO liquidation must be disclosed in a footnote.
LIFO
Previous methods of applying FIFO/LIFO is costly (record keeping) because the company has to keep track of individual units of inventory.
LIFO
Revenues and expenses are better matched under FIFO/LIFO.
LIFO
FIFO COGS + increase in LIFO reserve or decrease in LIFO reserve
LIFO COGS
Based on the ______ IRS states that only companies which use LIFO for financial reporting can use LIFO for tax return.
LIFO Conformity Rule
FIFO Inventory- LIFO Reserve
LIFO Inventory
What are the two methods of LIFO Simplification?
LIFO Inventory Pools, Dollar-Value LIFO (DVL)
FIFO Inventory- LIFO inventory
LIFO Reserve
Results from keeping dual books
LIFO Reserve
If unit costs are increasing, (FIFO/LIFO) will result in a higher cost of goods sold and lower ending inventory than (FIFO/LIFO).
LIFO, FIFO
Some companies use FIFO/LIFO for income tax and financial reporting but use FIFO/LIFO for internal accounting (I.e pricing decision, bonus computations, etc.)
LIFO, FIFO
Which inventory system would fit the following attributes would fit the following attributes (perpetual or periodic)? - Adjusts inventory quantities and records COGS only at the end of each reporting period. - Several temporary accounts (purchase, freight-in, purchase returns, and purchase discounts) to be closed (at period end) to (ending) inventory and COGS - Perform periodic physical inventory count to determine the ending inventory at period-end - Estimate COGS by: beg. inventory + purchases - ending inventory
Periodic Inventory System
_______FIFO results in cost of goods sold and ending inventory amounts that are the same as those obtained using periodic FIFO.
Perpetual
Cost of "merchandise" inventory include the_____plus any costs necessary to get the goods in condition and location for sale.
Purchase price
If the goods are shipped f.o.b. (free on board) shipping point, the legal title to the goods changes hands at the point of shipment when the seller delivers the goods to the common carrier (for example, a trucking company). The (seller/purchaser) is responsible for shipping costs and transit insurance.
Purchaser
A LIFO Reserve accounting is a contra inventory account (true/false).
True
If various portions of inventory are acquired at different costs, we need a way to decide which units were sold and which remain in inventory (true/false)
True
The average cost method usually produces amounts that fall in between the FIFO and LIFO amounts for both cost of goods sold and ending inventory (true/false).
True
The gross method views a discount not taken as part of the cost of inventory (true/false).
True
In the periodic inventory system, weighted average is calculated only at the end of the period as follows:
Weighted-average unit cost = Cost of goods available for sale/quantity available for sale
When taking into account the gross and net method, will there be a difference in gross profit between the two methods equal to the amount of discounts not taken.
Yes
If damaged and stolen inventory are identified, the items must be removed from (beginning/ending inventory or purchases) before calculating cost of goods sold and then classified as a separate expense item.
beginning inventory
If a ______ is found, the consignee "sends" the selling price (less commission and approved expenses) to the consignor.
buyer
When merchandise is returned, the (buyer/seller) records a purchase return.
buyer
When a customer returns merchandise, the seller records a sales return which is a (revenue/contra- revenue account).
contra-revenue account
A sale is recorded by the _______only when the goods are sold by the consignee and title passes to the customer.
cosigner
The ____ index for the base year is set as 1.
cost
If unit costs are increasing/decreasing, FIFO will result in the higher COGS and lower EI than LIFO.
decreasing
In a periodic inventory system, the average cost is computed only at the (beginning/end) of the period.
end
An important objective-- matching the ___ (cost of goods sold) with the ___generated from the sale of inventory.
expense, revenue
If goods are shipped (f.o.b. destination/shipping point), Company X includes the goods in its 2018 ending inventory and the sale is not recorded until January 3, 2019, when those goods reach Company Y. Company Y also will wait until 2019 to record the purchase
f.o.b destination
If the goods are shipped (f.o.b. destination/shipping point), the seller is responsible for shipping, and legal title does not pass until the goods arrive at their destination (the customer's location).
f.o.b destination
Units are used/ignored when computing ending inventory and COGS (instead, layers are comprised of dollar values)
ignored
The effect on the financial statements of the difference between the gross method and net method usually is (material/immaterial). Net income over time will (be the same/not be the same) using either method.
immaterial, not be the same
In a perpetual inventory system, the purchase return is recorded directly as an (increase/reduction) to the inventory account.
increase
The cost of ____ includes the purchase price plus all other costs necessary to get the goods in condition and location for sale.
inventory
The costs of ____ units follow their physical movement from one stage of activity to another.
inventory
Inventory shipped f.o.b. shipping point
is included in the purchaser's inventory as soon as the merchandise is shipped
LIFO Liquidation: when companies purchase more/less units than they sell, they liquidate a previous layer of inventory.
less
Under the (periodic/perpetual inventory system), purchase discounts are treated as a reduction in the inventory account.
perpetual
The (periodic/perpetual system) may be more expensive to implement than a (perpetual/periodic) system. This is particularly true for inventories consisting of large numbers of low-cost items.
perpetual, periodic
For both inventory systems, the measurement of inventory and cost of goods sold starts with determining the _____ of goods.
physical units
______ represent reductions in the amount to be paid if remittance is made within a designated period of time.
purchase discounts
LIFO inventory pools are formed of units that possess physical differences/similarities.
similarities
As with the seller, the purchaser can record purchase discounts using two types of methods.
gross method and net method
In contrast with merchandising companies, _____companies produce the goods they sell to wholesalers, retailers, other manufacturers, or consumers. Inventory for a _____ consists of: (1) raw materials (2) work in process (3) finished goods.
manufacturing, manufacturer
In the Periodic Inventory System, Purchase Returns and Purchase Discounts are used (true/false).
true
Inventory belongs to the consignor and should be included in inventory of the consignor even though not in the company's physical possession (True/False).
true
The cost of goods sold equation assumes that all inventory quantities not on hand at the end of the period were sold (true/false).
true
When a company uses a perpetual inventory system to record inventory and cost of goods sold transactions, merchandise cost data also is included in the system (true/false).
true
The (FIFO/LIFO) method assumes that items sold are those that were most recently acquired.
LIFO
The following example would fall under which inventory system? Purchase---100 A/P----------100 (inventory purchased) Freight-in 20 A/P------------20 A/R-----150 Sales-----------150 (inventory sold)
Periodic Inventory JE's
Because the specific identification method is costly, most companies use other cost flow methods that assume which units of inventory have been sold and which units remain in ending inventory (True/false).
True
True or false: Physical counts of inventory usually are made in the perpetual system anyway, either at the end of the fiscal year or on a sample basis throughout the year, to verify that the system is correctly tracking quantities. .
True
Cost in layer year/cost in base year
cost index in layer year
Beginning inventory plus net purchases during the period is the ______ for sale.
cost of goods available for sale
From a control perspective, by recording _____ as a separate item, management can more easily track its freight costs. The same perspectives pertain to purchase returns and purchase discounts.
freight-in
The cost of _____ paid by the purchaser generally is part of the cost of inventory.
freight-in
_________ include beginning inventory plus purchases
goods available for sale
What are the three most common cost flow assumption methods?
(1) FIFO (2) LIFO (3) Average cost or weighted average
Freight costs are added to the inventory account in a (1) system. In contrast, in the (2) system, freight costs are recorded in a temporary account called freight-in or transportation-in.
(1) perpetual system (2) Periodic system
On October 5, 2018, Fox Hills Wholesale Beverage Company purchased merchandise at a price of $20,000. The repayment terms are stated as 2/10, n/30. Lothridge paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the remaining balance of $6,000 on November 4. Lothridge employs a periodic inventory system Write the needed journal entries using the gross method.
10/5 Purchases-----------------------20,000 A/P---------------------------------------20,000 10/14 A/P------------------------------14,000 Purchase discount-----------------------280 Cash-----------------------------------13,720 11/4 A/P--------------------------------6,000 Cash------------------------------------6,000
The _________ includes a debit to sales returns and a credit to refund liability (or allowance for sales returns in the case of credit sales). At the same time, COGS is reduced and an estimated returned inventory is made.
Adjusting entry for estimated sales returns
In FOB Shipping Point, shipping cost are incurred by the buyer/seller.
Buyer
Invoice price + shipping cost incurred by buyer are the ___ incurred by buyer.
Costs
____ combines a large variety of goods into one pool.
Dollar-Value LIFO (DVL)
In a periodic inventory system, this weighted average is calculated only at the (beginning/end) of the period as follows:
End
Computer used for office use are not available for sale to customers and therefore are classified and accounted for as __________.
Equipment
Give some examples of situations in which identifying inventory items would be difficult.
Example: goods in transit, goods on consignment, and sales returns.
While the purchase price is included in inventory, give a few examples of other costs that are included in inventory.
Examples include freight charges, insurance costs incurred by the buyer, cost to unload, unpack, and preparing merchandise inventory for sale, raw materials for use
Freight-in/freight-out is reported in the income statement either as part of cost of goods sold or as an operating expense (usually among selling expenses).
Freight-out
________ allocates units and inventory cost between ending inventory (EI) and Cost of Goods Sold (COGS)
Inventory Cost Flow Assumptions.
This inventory system estimates COGS by: Beg. Inventory + purchases - end. inventory
Period Inventory System
Merchandise purchases, purchase returns, purchase discounts, and freight-in (purchases plus freight-in less returns and discounts equals net purchases) are recorded in temporary accounts. In addition, the period's cost of goods sold is determined at the END of the period by combining the temporary accounts with the inventory account: Beginning inventory + Net purchases − Ending inventory = Cost of goods sold
Periodic inventory system
in the _____inventory system, inventory is debited directly.
Perpetual
The following journal entries would fall under which inventory system? Example: Inventory-----100 A/P--------------100 A/R---------150 Sales--------150 COGS-------100 Inventory----100
Perpetual Inventory System
This inventory system estimates inventory by: Beg inventory + purchases- COGS
Perpetual Inventory System
Which inventory system would fit the following attributes (perpetual or periodic)? - Continuously records changes in inventory quantity and inventory costs. - One permanent inventory account - Records each purchase, sale, return, etc. - Calculate COGS each time goods are sold - Estimate ending inventory by: Beg Inventory + Purchases- COGS - Actual quantity of inventory is verified through physical inventory counts (differences could be due to theft, spoilage, breakage...)
Perpetual Inventory System
An important feature of this type of inventory system is that it tracks inventory quantities from their acquisition to their sale. It also allows management to determine how many goods are on hand on any date without having to take a physical count, assuming that there isn't defects or system errors.
Perpetual inventory system
_______ make up the cost of components purchased from suppliers that will become part of the finished product. For example, semiconductors, circuit boards, plastic, and glass that go into the production of personal computers.
Raw materials
In FOB Destination Point: shipping cost incurred by the buyer/seller.
Seller
The _____ is used frequently by companies selling unique, expensive products with low sales volume which makes it relatively easy and economically feasible to associate each item with its actual cost. For example, automobiles have unique serial numbers that can be used to match a specific auto with the invoice identifying the actual purchase price.
Specific Identification System
0. Determine ending inventory at CURRENT YEAR (end-of-year prices) 1. Convert the ending inventory to BASE YEAR prices and compare ending inventory (base-year prices) to beginning inventory at base-year prices. 2. Compute the difference. An increase represents a new LIFO layer. Convert the new layer to end-of-year prices. 3. LIFO ending inventory is beginning inventory (as reported in the balance sheet at the end of the prior year) plus new LIFO layer.
Steps for Dollar-Value LIFO
Periodic Inventory System
The inventory account is adjusted at the end of a reporting cycle.
Perpetual Inventory System
The inventory account is continuously updated as purchases and sales are made.
Goods held on _______are included in the inventory of the consignor until sold by the consignee.
consignment
The goods are physically transferred to the other company but the transferor retains legal title.
consignment
_______ are in between those of LIFO and FIFO
average cost values
The ______ applied to goods sold or to ending inventory is not simply an average of the various unit costs of purchases during the period but an ______weighted by the number of units acquired at the various unit costs.
average unit cost, average unit cost
Generally, invoice price + shipping costs is incurred by the buyer/seller.
buyer
Average cost for all of the pool purchases during the period is applied to the current/last year's LIFO layer.
current year
It is easy/difficult to maintain consistencies in pools because of new product introductions and old product discontinuances (true/false).
difficult
In the Perpetual System, inventory is credited directly/indirectly.
directly
Inventory shipped (f.o.b. destination/shipping point) is included in the purchaser's inventory only after it reaches the purchaser's destination
f.o.b destination
If the consignee can't find a buyer, the consigner lets the consignee keep the goods (true/false).
false; the items are returned to the cosigner
________ are goods that have been completed in the manufacturing process but have not yet been sold. They have reached their final stage and now await sale to a customer. Their cost includes the cost of all raw materials and work-in-process used in production.
finished goods
Ending inventory applying LIFO consists of the items acquired (first/last).
first
These types companies purchase items in finished form and act as intermediaries in the process of moving goods from the manufacturer to the end-user. They often are referred to as _____ companies and their inventory as_____inventory.
merchandise and retail
By both the gross and net method, ___purchases are reduced by discounts taken.
net
The (gross/net method) considers the cost of inventory to include the net, after-discount amount, and any discounts not taken are reported as interest expense. The discount is viewed as compensation to the seller for providing financing to the buyer.
net method
Refer to the following cost of goods sold calculation (Beginning inventory + Net purchases − Ending inventory = Cost of goods sold). Purchase returns are subtracted from total purchases to calculate _____ purchases.
net purchases
Shipping charges on outgoing goods (freight-out) are (included/ not included) in the cost of inventory.
not included
________costs include electricity and other utility costs to operate the manufacturing facility, depreciation of manufacturing equipment, and many other manufacturing costs that cannot be directly linked to the production of specific goods.
overhead
A (periodic/perpetual inventory system) adjusts inventory and records cost of goods sold only at the end of each reporting period
periodic
in ____ system, purchase returns and purchase discounts are used.
periodic
A (perpetual/periodic inventory system) is NOT designed to track either the quantity or cost of merchandise. The merchandise inventory account balance is NOT adjusted as purchases and sales are made but at the end of a reporting period. A physical count of the period's ending inventory is made and costs are assigned to the quantities determined.
periodic inventory system
This type inventory system is less costly to implement during the period but requires a physical count before ending inventory and cost of goods sold can be determined. This makes the preparation of interim financial statements more costly unless an inventory estimation technique is used.
periodic inventory system
In __ system, inventory is credited directly.
perpetual
In the (periodic/perpetual inventory system), the average cost method is applied by computing a "moving average unit cost" each time additional inventory is purchased
perpetual
The new average, under the perpetual/periodic average cost system, is determined after each purchase by: (1) summing the cost of the previous inventory balance and the cost of the new purchase (2) dividing this new total cost (cost of goods available for sale) by the number of units on hand (the inventory units that are available for sale). This average is then used to cost any units sold before the next purchase is made.
perpetual
Differences between the quantity of inventory determined by the physical count and the quantity of inventory according to the (periodic/perpetual inventory system) could be caused by system errors, theft, breakage, or spoilage.
perpetual inventory system
The (periodic/perpetual inventory system) also directly determines how many items are sold during a period.
perpetual inventory system
_____ systems are more workable with inventories of high-cost items such as construction equipment or automobiles. However, with the help of computers and electronic sales devices such as cash register systems with barcode scanners, the ____system now is available to many small businesses that previously could not afford them and is economically feasible for a broader range of inventory items than before.
perpetual inventory system
_______systems can provide more information about the dollar amounts of inventory levels on a continuous basis. They also facilitate the preparation of interim financial statements by providing fairly accurate information without the necessity of a physical count of inventory.
perpetual inventory system
it is important to remember that this type of inventory system involves the tracking of both inventory quantities and costs. Many companies that use the periodically employ systems to constantly monitor inventory quantities.
perpetual inventory system
The costs included in inventory are called _____costs. They are connected to related products and expensed as cost of goods when those particular items are sold.
product
In a periodic system, we use a (contra-revenue account/purchase returns account) to temporarily accumulate return amounts.
purchase returns account
A company includes in ending inventory the cost of merchandise sold it anticipates will be ______.
returned
LIFO Liquidation: If prices have been falling/rising, this means the liquidated units have a lower cost than what the company would have to currently pay to purchase the inventory today. The result is a boost in net income.
rising
Periodic and Perpetual FIFO are the same/different in terms of EI and COGS.
same
When the right of return exists, a ____must be able to estimate those returns before revenue can be recognized (true/false).
seller
Purchase discounts recorded under the gross method are (added/subtracted) from total purchases when determining net purchases.
subtracted
Notes to financial statements must disclose net of___ effect of LIFO Liquidation.
tax
because risk is retained by the consignor, the sale is not complete (revenue is not recognized) until an eventual sale to a ______ party occurs. As a result, goods held on consignment generally are not included in the consignee's inventory.
third party
Ending inventory applying LIFO consists of the items acquired first (true/false).
true
________ inventory refers to the products that are not yet complete in the manufacturing process. The cost of_______ 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.
work-in-process