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