Acct 2010 Exam 3

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The primary goals of inventory management

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1) to have sufficient quantities of high-quality inventory
2) minimizing the costs of carrying inventory such as production, storage, obsolescence, and financing

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tangible property held for sale in the normal course of business or used in producing goods or services for sale

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Inventory

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goods held for resale in the normal course of business; the goods usually are acquired in a finished condition and are ready for sale without further processing

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Merchandise Inventory

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items acquired for processing into finished goods

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Raw materials inventory

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goods in the process of being manufactured but not yet complete

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Work in process inventory

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Manufactured goods that are complete and ready for sale

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Finished Goods Inventory

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Requires that inventory be recorded at the price paid or the consideration given

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The Cost Principle

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Sum of the costs incurred in bringing an article to usable or salable condition and location

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Inventory Cost

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In general, the company should cease accumulating costs in inventory when...

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the raw materials are ready for use or when the merchandise inventory is ready for shipment

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Earnings of employees who work directly on the products being manufactured

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Direct Labor

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Includes manufacturing costs such as the costs of heat, light, and power to operate the factory

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Factory Overhead

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2 costs included in WIP Inventory

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1) Direct Labor

2) Factory Overhead

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Goods Available for Sale Equation

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Beginning Inventory + Purchases

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Costs of Goods Sold Equation

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Goods Available - Ending Inventory

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Four generally accepted inventory costing methods

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Specific Identification
First-in, First-out
Last-in, First-out
Weighted Average

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The four inventory costing methods are alternative ways to

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assign the total dollar amount of goods available for sale between ending inventory and cost of goods sold

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When units are sold, the specific cost is added to COGS; commonly used in businesses that have low sales volume of high dollar items (car dealerships, jewelry stores)

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Specific Identification Method

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The choice of an inventory costing method is not based on

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physical flow of goods on and off the shelves; that is why they are called cost flow assumptions

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When using first-in, first-out, we assign the ________ costs to the units sold

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older

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When using last-in, first-out, we assign the _________ costs to the units sold

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most recent

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The average cost is determined by

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cost of goods available for sale / units on hand

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In periods of rising prices, ________ will provide the lowest Cost of Goods Sold amount

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FIFO

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In periods of rising prices, ________ will provide the lowest Net Income

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LIFO

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Advantage of weighted average

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smoothes out peaks and valleys in price changes

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Advantage of FIFO

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does a great job of valuing Ending Inventory at an approximate replacement cost

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Advantage of LIFO

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does a great job of matching current costs in Cost of Goods Sold with current revenues

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If LIFO is used on the income tax return, it must also be used to calculate inventory and cost of goods sold for financial statements

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LIFO Conformity Rule

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Ending Inventory is reported at the

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Lower of Cost or Market (LCM)

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Difference between the purchase cost and the lower replacement cost; it is added to the cost of goods sold of the period

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Holding Loss

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Recognition of holding gains on inventory is/isn't permitted by GAAP

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is not

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Journal Entry to recognize LCM

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____________________DR_______CR
COGS $50,000
Inventory $50,000

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inventory turnover ratio reflects

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how many times average inventory was produced and sold during the period

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A higher Inventory Turnover Ratio means

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inventory moves more quickly thus reducing storage and obsolescence costs

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Beginning LIFO Reserve
(excess of FIFO over LIFO)

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Beg Inventory FIFO -- Beg Inventory LIFO

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Difference in COGS under FIFO

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Beginning LIFO reserve -- Ending LIFO Reserve

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After cash ______ is the second asset most vulnerable to theft

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inventory

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A detailed inventory record is maintained, recording each purchase and sale during the accounting period; This up-to-date record is maintained on a transaction-by-transaction basis; purchase transactions are recorded directly in an inventory account

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Perpetual Inventory System

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ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical count (used less often)

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Periodic Inventory System

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When a LIFO company sells more inventory than it purchases or manufactures, items from beginning inventory become part of cost of goods sold

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LIFO Liquidation

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Requires notification in a company's financial statements of the cost flow method used

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Full Disclosure Principle

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LCM is an example of the ________ restraint

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conservatism

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Long-lived assets

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assets that are used actively in the operations of business, and that are expected to benefit the operations into the future

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The fixed-asset turnover ratio measures

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how effectively a company manages its fixed assets to generate revenue

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Purchase price as well as all costs necessary to get the asset in place and ready for its intended use

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Acquisition Cost of an Asset

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Finance charges are/are not included in the cost of an asset

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are not

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Recording acquisition costs as assets is referred to as __________ the costs.

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capitalizing

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In any noncash acquisition, the components of the transaction should be recorded at their __________

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fair values

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Generally, subsequent expenditures for ordinary repairs and maintenance are.....These are amounts are called ________

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expensed in the period incurred; revenue expenditures

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Subsequent expenditures that are for betterments like overhauls that extend the life of the asset, and additions are ...These amounts are called ________

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capitalized instead of expensed; capital expenditures

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The decision to capitalize an expenditure results in higher ________ and _______

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current income and current taxes

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A revenue expenditure charges the amount to expenses in the current period resulting in ________ current income ________ current taxes

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lower; lower

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Many companies have policies regarding the expensing of all expenditures below a certain amount according to the

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Materiality constraint

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Refers to the sum of beginning inventory and purchases (or transfers to finished goods) for the period

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Goods Available for Sale

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Valuation method departing from the cost principle; it serves to recognize a loss when replacement cost or net realizable value drops below cost.

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Lower of Cost or Market (LCM)

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Current purchase price for identical goods

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Replacement Cost

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Expected sales price minus sales costs

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Net Realizable Value

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contra-asset for the excess of FIFO over LIFO inventory

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LIFO reserve

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Sale of a lower-cost inventory item from beginning LIFO inventory

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LIFO Liquidation

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Net cash equivalent amount paid or to be paid for the asset

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Acquisition Cost

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Represents interest expenditures included in the cost of a self-constructed asset

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Capitalized Interest

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Expenditures for normal operating upkeep of long-lived assets

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Ordinary Repairs and Maintenance

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Maintain the productive capacity of the asset during the current accounting period only and are recorded as expenses

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Revenue Expenditures

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Infrequent expenditures that increase an asset's economic usefulness in the future

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Additions and Improvements

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Increase the productive life, operating efficiency, or capacity of the asset and are recorded as increases in asset accounts, not as expenses

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Capital Expenditures

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Process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method

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Depreciation

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Acquisition cost of an asset -- accumulated depreciation

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Net Book (or Carrying) Value

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Method that allocates the cost of an asset in equal periodic amounts over its useful life

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Straight-line Depreciation

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Method to allocate the cost of an asset over its useful life based on the relations of its periodic output to its total estimated output

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Units of Production Depreciation

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An asset is impaired if...

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Book Value > Future Cash Flows

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Impairment loss is calculated by

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Book Value -- Fair Value

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Systematic and rational allocation of the cost of a natural resource over the period of exploitation

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Depletion

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Systematic and rational allocation of the acquisition cost of an intangible asset over its useful life

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Amortization

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Exclusive legal right to use a special name, image, or slogan

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Trademark

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Exclusive right to publish, use, and sell a literary, musical, or artistic work

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Copyright

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Granted by the federal government for an invention; It is an exclusive right given to the owner to use, manufacture, and sell the subject of this item

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Patent

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Contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region

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Franchise

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Obtained through agreements with governmental units or agencies, permit owners to use public property in performing their services

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Licensees and Operating Rights

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Ability to pay current obligations

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Liquidity

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Expenses that have been incurred but have not been paid at the end of the accounting period

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Accrued Liabilities

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Interest that is associated with the use of money over time

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Time Value of Money

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Revenues that have been collected but not earned; they are liabilities until the goods or service are provided

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Deferred Revenues (or Unearned Revenues)

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Potential liability that has arisen as the result of a past event; not an effective liability until some future event occurs

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Contingent Liability

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The chance that future event(s) will occur is high

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Probable

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The chance that the future event or events will occur is more remote but less than likely

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Reasonably Possible

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The chance that the future event or events will occur is slight

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Remote

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When a company leases an asset on a short-term basis; no liability is recorded

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Operating Lease

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When a company leases an asset on a long term basis; meets one of the four criteria established by GAAP; results in the recording of an asset and liability

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Capital Lease

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Current value of an amount to be received in the future; a future amount discounted for compound interest

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Present Value

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Series of periodic cash receipts or payments that are equal in amount each interest period

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Annuity

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________ is a tangible asset that is not depreciated

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Land

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Natural resources are
a) depreciated
b) depleted
c) amortized
d) none of the above

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Depleted

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Intangible assets with a definite life (patents, copyrights, franchises) are
a) depreciated
b) depleted
c) amortized
d) none of the above

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Amoritized

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Intangible assets with an indefinite life (trademarks, goodwill) are
a) depreciated
b) depleted
c) amortized
d) none of the above

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none of the above

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Assets that are used actively in the operations of business, and that are expected to benefit the operations into the future

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Long-lived assets

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Intangible assets are current/non-current assets

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Non-current

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Fixed assets less accumulated depreciation or depletion

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Net Fixed Assets

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The acquisition cost does not include

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Financing charges and cash discounts

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On July 7, Southwest gave Boeing 9,000,000 shares of $1.00 par value common stock with a market value of $5 per share plus $25,000,000 in cash for aircraft.

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.

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Are ordinary repairs and maintenance recognized as capital or revenue?

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Revenue

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Are extraordinary repairs recognized as revenue or capital?

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Capital

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Are additions and improvements recognized as revenue or capital?

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Capital

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The decision to capitalize an expenditure results in _______ current income and _______ current taxes

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Higher; higher

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Charges the amount to expenses in the current period resulting in lower current income and lower current taxes

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Revenue Expenditure

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The easiest and most widely used depreciation method is

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Straight-line depreciation

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The book value is equal to the _______ at the end of the asset's useful life in all 3 depreciation methods

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Estimated residual value

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Matches higher depreciation expense with higher revenues in the early years of an asset's useful life when the asset is more efficient

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Accelerated Depreciation

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If an asset's value decreases and cannot be recovered through future use or sale, the asset is considered to be

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Impaired

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The impaired asset should be written down to its _________ resulting in a loss being recognized

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Net realizable value

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Natural resources are current/non-current assets

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Non-current

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We compute depletion expense using the _______ method

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Units of production

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We compute amortization expense using the _______ method

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Straight line depreciation

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Give two examples of intangible assets that are NOT amortized

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trademarks, goodwill

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Obligations to pay for goods and services used in the basic operating activities of the business

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Accounts payable (trade accounts payable)

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Obligations related to expenses that have been incurred, but will not be paid until the subsequent period

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Accrued liabilities (accrued expenses)

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Obligations due supported by a formal written contract

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Notes Payable

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Obligations arising when cash is received prior to the related revenue being earned

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Deferred revenues (unearned revenues)

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All items withheld from an employee's compensation create ________ for the employer

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Current liabilities

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If a business has too little working capital, it runs the risk of

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not being able to meet its obligations to creditors

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If a business has too much working capital, it may

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tie up resources in unproductive assets and incur additional costs

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Companies can raise long-term debt capital directly from a number of financial service organizations including banks, insurance companies, and pension plans. Raising debt from one of these organizations is known as

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Private placement

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Publically traded debt

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bonds