accounting chapter 8-inventories and costs of goods sold

With the extensive use of technology, today most large businesses use ________ inventory systems

With the extensive use of technology, today most large businesses use perpetual inventory systems

A. Average cost: all merchandise (what does this include?) are valued at the ...... per unit. -changes in current replacement costs of inventory are concealed

A. Average cost: all merchandise (units sold and units remaining in inventory) are valued at the average cost per unit. -changes in current replacement costs of inventory are concealed

B. FIFO: goods sold are the ____ units purchased (_____) and the remaining inventory is the _____ (most recent or oldest purchased?) i. When purchase costs are rising (i.e., in periods of inflation), FIFO assigns the (highest or lowest?) costs to cost of goods sold (expense) and (highest or lowest?) cost to goods remaining in inventory. -(overstates or understates?) net income -value of inventory on the balance sheet more closely approximates _____ cost

B. FIFO: goods sold are the first units purchased (oldest) and the remaining inventory is the newest (most recently purchased) i. When purchase costs are rising (i.e., in periods of inflation), FIFO assigns the lowest costs to cost of goods sold (expense) and highest cost to goods remaining in inventory. -overstates net income -value of inventory on the balance sheet more closely approximates replacement cost

C. LIFO: goods sold are the (most recent or oldest?) (____) and remaining inventory is _____ ( _____ purchased) i. current sales revenue is offset by current cost of merchandise sold ii. value of inventory on the balance sheet is ______ iii. (overstates or understates?) net income -favorable from a ____ perspective (i.e., _____ taxes) 1. LIFO conformity requirement (If I use LIFO for tax, I must also use for ____) iv. (recognized or not recognized?) by international standards

C. LIFO: goods sold are the most recently acquired (newest) and remaining inventory is oldest (first purchased) i. current sales revenue is offset by current cost of merchandise sold ii. value of inventory on the balance sheet is understated iii. understates net income -favorable from a tax perspective (i.e., lower taxes) 1. LIFO conformity requirement (If I use LIFO for tax, I must also use for GAAP) iv. Not recognized by international standards

When identical units of inventory have different unit costs, a question arises as to which costs should be used in measuring COGS.

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Inventory turnover formula -higher=____ liquid

cost of goods sold/average inventory (py inventory + cy inventory)/2 -higher=more liquid

Cost flow assumptions: when items in inventory are relatively _______, sellers can make an assumption as to the sequence in which units are sold from inventory. -Cost flow assumption (does or does not?) need to correspond to the actual physical movement of the company's merchandise.

Cost flow assumptions: when items in inventory are relatively homogeneous, sellers can make an assumption as to the sequence in which units are sold from inventory. -Cost flow assumption does NOT need to correspond to the actual physical movement of the company's merchandise.

Days in inventory: estimate of the average ........ inventory remains on the _____ ____ before it is sold. formula: ? higher= ____ liquid

Days in inventory: estimate of the average number of days inventory remains on the balance sheet before it is sold. formula: 365/inventory turnover higher= less liquid (lower is more liquid)

FIFO: In periods of rising prices, it results in _____ cogs, ______ profit, and _____ ending inventory. LIFO: In periods of rising prices, it results in _____ cogs, _____ profit, and _____ ending inventory.

FIFO: In periods of rising prices, it results in low cogs, high profit, and high ending inventory. LIFO: In periods of rising prices, it results in high cogs, low profit, and low ending inventory.

In a merchandising company, inventory consists of all goods _____ and held for _____ to customers. -inventory is a ________ asset and usually is shown in the balance sheet at its _____. -typically listed immediately after .....?

In a merchandising company, inventory consists of all goods owned and held for sale to customers. -inventory is a nonfinancial asset and usually is shown in the balance sheet at its cost. -typically listed immediately after accounts receivable

Inventory turnover: indicates ....... in the course of a year a company is able to sell the amount of its ______ _____. -useful in evaluating the _______ of a company's inventory -may be used to identify inventory that is not selling well and may have become ______

Inventory turnover: indicates how many times in the course of a year a company is able to sell the amount of its average inventory -useful in evaluating the liquidity of a company's inventory -may be used to identify inventory that is not selling well and may have become obsolete

Periodic inventory system: cost of merchandise purchased during the year is debited to a ______ account rather than directly to ______. -When merchandise is sold to a customer, an entry is made recognizing the _____ _____ but no entry is made to reduce the ______ account or to recognize the costs of goods sold until ......? -Companies measure physical inventory by performing a systematic count of all goods on hand at or near the end of the year and then compute the cost of goods sold by measuring the difference between ....... available by sale and ending _______.

Periodic inventory system: cost of merchandise purchased during the year is debited to a purchases account rather than directly to inventory. -When merchandise is sold to a customer, an entry is made recognizing the sales revenue but no entry is made to reduce the inventory account or to recognize the costs of goods sold until the end of the year. -Companies measure physical inventory by performing a systematic count of all goods on hand at or near the end of the year and then compute the cost of goods sold by measuring the difference between costs of goods available by sale and ending inventory.

Perpetual inventory system: inventory records are kept........? -As items are sold from inventory, their costs are removed from the _____ _____ and transferred to .......?, which is offset against sales revenue in the income statement. (sales-cogs= gross profit)

Perpetual inventory system: inventory records are kept continuously up-to-date -As items are sold from inventory, their costs are removed from the balance sheet and transferred to cost of goods sold, which is offset against sales revenue in the income statement. (sales-cogs= gross profit)

Specific identification: actual costs of the specific units sold are transferred from ______ to .....? -Best suited for ______ inventories of _____ price, _____ volume items Examples: ? -may produce misleading results when units of inventory are (nearly) _____ by implying ............ that do not exist -can manipulate the financial statements by selecting which items are sold

Specific identification: actual costs of the specific units sold are transferred from inventory to cost of goods sold -Best suited for unique inventories of high price, low volume items Ex: car dealership, art gallery, custom jewelry -may produce misleading results when units of inventory are (nearly) identical by implying differences in value that do not exist -can manipulate the financial statements by selecting which items are sold

The three types of cost flow assumptions: a. b. c.

The three types of cost flow assumptions: a. average cost b. first-in, first-out (FIFO) c. last-in, first-out (LIFO)