Chapter 6

average days in inventory

365/inventory turnover ratio better inventory management if ratio is low

income statement

COGS is an expense, it is the cost of inventory sold in this period

FIFO

First in, First out units sold assumed to be the first ones purchased COGS are the oldest costs Ending inventory are the newest costs results in higher net income and higher total assets if prices are increasing reports the most recent/newest costs as inventory on balance sheet most companies use

Perpetual

Inventory

major difference between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

Inventory cost of goods sold

Periodic

Purchases

to avoid overstating inventory/assets

US GAAP requires companies to report inventory on the BS at the lower of cost (LIFO, FIFO, AVG) or NRV

specific identification

company actually uses the cost of the specific unit sold, makes sense but only works with unique, expensive products

average cost

cost of all units is the weighted average weighted average= COG available for sale/ total # of units available for sale

How this works:

determine the cost of ending inventory at the end of the period using inventory cost flow method (LIFO FIFO AVG) find the NRV of ending inventory= expected selling price - selling costs if cost< NRV report inventory on the BS at cost If cost > NRV report inventory on the BS at NRV -record and adj entry for the difference between cost and NRV - COGS XXX - Inventory XXX

net realizable value of inventory

expected selling price - selling cost

LIFO

last in, first out units sold assumed to be the last ones purchased COGS are the newest costs Ending inventory are the oldest costs reports the most recent/newest costs as COGS on income statement generally results in lower taxes if prices are rising

the ______ method of valuing inventory was developed to avoid reporting inventory at an amount that is _____ than the benefits it can provide

lower of cost and NRV greater

in times of rising prices, COGS determined using the LIFO inventory assumption typically will be _________ COGS determines using the FIFO inventory assumption

more than

Gross Profit =

net sales revenue minus cost of good sold

multi-step income statement

organized to give financial statement users more info sales revenue, COGS, gross profit are reported separately from other types of revenues and expenses operating income (generated by operating activities) is reported separately from non operating/other income

wholesale and retail companies

purchase goods that are primarily in completed form

manufacturing companies

purchase goods that are used to produce another product

IC- gross profit

sales revenue- COGS

which of the following represent a reason why managers closely monitor inventory levels

to minimize costs of inventory write-downs due to obsolete inventory to ensure that sufficient units are available

If a company uses the perpetual inventory system, how manny entries are made when a sale occurs

two

Balance sheet

inventory

Balance sheet

inventory is an asset, it is the cost of inventory not sold in this period

products sold by retailers and manufacturing companies are called

inventory-plans to resell to customer

inventory

items held for resale items currently in production for future sale items used currently in the production of goods to be sole

The effect of the adjusting entries relating to the periodic inventory system is to

recognize COGS relating to sales during the period reflect the proper ending balance in the inventory account close the temporary accounts relating to inventory purchases, discounts, and returns and allowances

who sells to customers?

service companies-->customers manufacturing companies buy raw materials+ labor/overhead=product-->customers retailers/merchandising companies buy products-->customers

gross profit %

(excess of selling price over cost per $ of sales) Gross profit/ net sales more profit if % its higher

Inventory turnover ratio

= cost of good sold/ average inventory (beg inventory+end inventory/2) better inventory management if ratio is HIGH

The ______ inventory system records all inventory-related transactions in the inventory account and reduces inventory at the time of sale. The ____ inventory system uses separate accounts for these items and records COGS at the end of the accounting period.

Perpetual periodic

Perpetual inventory system

company can determine that cost of inventory still on hand by referring to the inventory account

Periodic inventory system

company must first take a physical inventory to determine the cost of inventory still on hand

why are firms required to use LCNRV?

conservation, better to understate assets than to overstate assets

the FIFO method assumes that units sold are the ______ units acquired

first

LIFO conformity rule

if LIFO is used on company's tax return, it must be used on financial statements

a multiple step income statement reports multiple levels of _______

income

companies that produce the inventory they sell are referred to as

manufacturers