Accounting Chapter 6

Front 1

Merchandising Company

Back 1

Inventory consists of many different items. These items have 2 common characteristics:
1) They are owned by the company
2) they are in a form ready for sale to customers. Only one inventory classification, merchandise inventory is needed to describe the many different items that make up the total inventory

Front 2

Manufacturing Company

Back 2

inventory is usually classified into 3 categories: Finished goods, Work in process, and Raw materials.

Front 3

FOB Shipping Point

Back 3

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller

Front 4

FOB destination

Back 4

ownership of the goods remain with he seller until the goods reach the buyer

Front 5

Consigned Goods

Back 5

In some lines of business, it is customary to hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods

Front 6

Specific Identification Method

Back 6

identifies the cost of particular units sold and those still remaining in ending inventory.
(major disadvantage is that management may be able to manipulate net income)

Front 7

FIFO

Back 7

method assumes that the earliest goods purchased are the first to be sold. Under FIFO, the cost of the ending inventory is obtained by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed.

Front 8

LIFO

Back 8

method assumes that the last goods purchased are the first to be sold. LIFO seldom coincides with the actual physical flow of inventory. Under LIFO, the cost of the ending inventory is obtained by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory have been costed.

Front 9

Average cost

Back 9

method assumes that the goods available for sale are similar in nature and allocates the cost of goods available for sale on the basis of weighted average unit cost incurred. The weighted average unit cost is then applied to the units on hand to determine the cost of the ending inventory.

Front 10

Inventory Error: Beginning inventory understated

Back 10

Cost of Goods Sold: Understated
Net Income: overstated

Front 11

Inventory Error: Beginning inventory overstated

Back 11

Cost of Goods Sold: Overstated
Net Income: Understated

Front 12

Inventory Error: Ending inventory understated

Back 12

Cost of Goods Sold: overstated
Net Income: understated

Front 13

Inventory Error: Ending inventory overstated

Back 13

Cost of Goods Sold: Understated
Net Income: overstated

Front 14

Balance Sheet Effects:
Ending Inventory Error: Overstated

Back 14

Assets: overstated
Liabilities: No Effect
SE: overstated

Front 15

Balance Sheet Effects:
Ending Inventory Error: Understated

Back 15

Assets: Understated
Liabilities: No Effect
SE: understated

Front 16

Tax Effects

Back 16

Both inventory on the balance sheet and net income on the income statement are higher when FIFO is used in a period of inflation. Many Companies have switched to LIFO because it yields the lowest net income and therefore, the lowest income tax liability in a period of increasing prices.

Front 17

LIFO Conformity Rule:

Back 17

-A tax rule that requires if a company uses LIFO for tax purposes it must also use LIFO for financial reporting purposes.
-Thus, if a company uses lifo to reduce its tax bills, it must show the lower net income on its external financial statements.

Front 18

Lower of cost or market (LCM)

Back 18

When the value of inventory is lower than its cost, the inventory is written down to its market value by valuing the inventory at the LCM in the period in which the price decline occurs.
-LCM is an example of conservatism

Front 19

Inventory Turnover Ratio

Back 19

(COGS) / (Average Inventory)

Front 20

Days in Inventory

Back 20

365 / (Inventory Turnover Ratio)