Financial Account Chapter 6

Front 1

Merchandising companies generally only have one type of inventory...

Back 1

Inventory that is finished and ready to sell.

Front 2

What are the three categories that manufacturers have?

Back 2

1. Raw Materials Inventory
2. Work-in-progress Inventory
3. Finished Goods Inventory

Front 3

Raw Materials Inventory

Back 3

Items to be used in the production of products

Front 4

Work-in-Progress Inventory

Back 4

Items partially completed

Front 5

Just-in-Case Inventory

Back 5

Inventory held as a buffer just in case unexpected problems occur.
Costly to maintain because of insurance, building usage and the cost of capital invested

Front 6

Just-in-Time Inventory

Back 6

Seeks to eliminate, or at least minimize, the amount of inventory on hand
Very difficult to obtain just-in-time inventory

Front 7

Goods in transit can cause...

Back 7

Uncertainty as to who owns the item. It is important to know in order to accurately determine inventory amounts.

Front 8

FOB shipping point

Back 8

(Free On Board) Buyer assumes ownership at the time the carrier accepts the item from the seller

Front 9

FOB destination

Back 9

(Free On Board) Seller maintains ownership until the buyer takes possession

Front 10

Physical counts are taken to...

Back 10

determine or verify the account on hand

Front 11

Reasons actual inventory may differ from the accounting records:

Back 11

1. Periodic inventory method is used
2. Theft
3. Spoilage
4. Errors

Front 12

To adjust the inventory to the physical inventory count...

Back 12

Debit Cost of goods sold
Credit Inventory

Front 13

Inventory Costing Methods

Back 13

Physical flow of goods - goods flow
Accounting cost flow assumption - cost flow
The flows don't have to be the same

Front 14

Methods of Costing Inventory

Back 14

1. Specific Identification
2. First-in, First-out (FIFO)
3. Last-in, First-out (LIFO)
4. Weighted-Average Cost

Front 15

Specific Identification Method

Back 15

Used by manufacturers producing high-value products that can be easily identified separately.
The cost of the specific item sold becomes the
cost of goods sold amount when an item is sold.
The cost on the balance sheet is the cost of the
specific items still on hand

Front 16

First-In, First-Out (FIFO)

Back 16

Assumes that the units purchased more recently remain on hand.
Assumes the earliest units purchased are the first units sold.

Front 17

Last-in, First-Out (LIFO)

Back 17

Assumes that the first units purchased remain on hand.
Assumes that later units purchased are the first units sold.

Front 18

LIFO Conformity Rule

Back 18

Any company that chooses LIFO for tax reporting must also use LIFO for financial reporting.

Front 19

Weight-Average Cost Method

Back 19

Averages the cost of purchases so that units are valued at an average, with each unit valued at the same cost.
New averages cause a re-averaging of unit costs.

Front 20

Gross Profit is larger using ____________ when prices are rising. Gross Profit is smaller using __________ when prices are rising.

Back 20

FIFO
LIFO

Front 21

Impacts of Specific Identification

Back 21

Closely identifies the actual cost of goods sold and ending inventory.

Front 22

Impacts of FIFO

Back 22

Approximates the physical goods flow for most
firms.

Front 23

Impacts of LIFO

Back 23

Popular because of potential tax savings.

Front 24

Impacts of Weighted-Average Cost

Back 24

Somewhere in-between FIFO and LIFO

Front 25

An error in ending inventory will cause an error of equal size in goods available for sale because...

Back 25

Sum of ending inventory + costs of goods sold = goods available for sale

Front 26

An error in ending inventory will cause an error the following year in...

Back 26

Beginning Inventory, Goods Available for Sale, and Cost of Goods Sold

Front 27

Lower-of-Cost-or-Market

Back 27

Companies must ensure that the recorded cost of ending inventory (cost) does not exceed the current replacement cost (market)

Front 28

In order to find the LCM you must compare the...

Back 28

Current replacement cost of inventory and the current inventory book value from the accounting values

Front 29

If replacement cost is less than
recorded book value...

Back 29

Write down inventory to the lower replacement cost

Front 30

If replacement cost is greater than recorded book value...

Back 30

Inventory value remains at its cost

Front 31

Inventory Turnover formula

Back 31

Cost of Goods Sold/Average Inventory

Front 32

Days' Sales Inventory Formula

Back 32

365/Inventory Turnover

Front 33

Under the periodic inventory method, the inventory
balance and the cost of goods sold are not computed
until...

Back 33

the end of the accounting period, after a
physical count of the ending inventory

Front 34

Under the perpetual inventory system, the inventory
account and the cost of goods sold are...

Back 34

kept perpetually up-to-date, with updates occurring after every purchase and every sale.