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45 Cards in this Set

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INVENTORY
Tangible property held for sale in the normal course of business, or used in producing goods or services for sale. pg 284
MERCHANDISE INVENTORY
Includes goods held for sale in the normal course of business. pg 284
RAW MATERIALS INVENTORY
Includes items acquired for the purpose of processing into finished goods. pg 284
WORK IN PROGRESS (WIP) INVENTORY
Includes goods in the process of being manufactured. pg 284
FINISHED GOODS INVENTORY
Includes manufactured goods that are complete and ready for sale. pg 284
DIRECT LABOR
Refers to the earnings of employees who work directly on the product being manufactured. pg 286
FACTORY OVERHEAD
Manufacturing costs that are not raw material or direct labor costs. pg 286
GOODS "AVAILABLE" FOR SALE
The sum of beginning inventory and purchases (or transfers to finished goods) for the period. pg 287
COST OF GOODS SOLD EQUATION
BI + P - EI = CGS

biginning inventory + purchases - ending inventory = cost of goods sold.
pg 287
SPECIFIC IDENTIFICATION METHOD
Identifies the cost of the specific item that was sold.
pg 289
FIFO
First-in, first-out method assumes that the first goods purchased (the first in) are the first goods sold. pg 290
LIFO
Last-in, first-out method assumes that the most recently purchased units (the last in) are sold first.
pg 292
AVERAGE COST METHOD
Uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory. pg 292
INCOME STATEMENT IS AFFECTED BY?
Cost of goods sold. (COGS)
pg 294
BALANCE SHEET IS AFFECTED BY?
Inventory pg 294
WEIGHTED AVERAGE COST METHOD
Generally gives income and inventory amounts that are between the FIFO and LIFO extremes. pg 293
"INCREASING COST" INVENTORIES
For inventories with increasing costs, LIFO is used on the tax return because it normally results in lower income taxes.
pg 294
"DECREASING COST" INVENTORIES
For inventory with decreasing costs (most common), FIFO is most often used for both the tax return and financial statements.
pg 295
WHEN UNIT COSTS ARE RISING..?
LIFO produces lower income and and lower inventory valuation then FIFO. pg 294
WHEN UNIT COSTS ARE DECLINING...?
LIFO produces higher income and higher inventory valuation then FIFO. pg 294
LEAST-LATEST RULE
Managers prefer to pay the least amount of taxes allowed by law as late as possible. pg 294
CONSISTENCY IN USE OF INVENTORY METHODS
Requires companies to apply their accounting methods on a consistent basis over time. A company is not permitted to use LIFO one period, FIFO the next, and then back to LIFO. A change in method is allowed only if the change will improve the measurement of financial results and financial position. pg 295
LCM RULE
This rule is known as measuring inventory at the Lower of Cost or Market.
pg 297
COST PRINCIPLE
Inventories should be measured initially at their purchase cost. When inventoried goods can be replaced with identical goods at a lower cost, the lower cost should be used as the inventory valuation.
pg 297
VALUE OF DAMAGED, OBSOLETE, OR DETERIORATED GOODS
The current estimated net realizable value (sales price less costs to sell) if that is below cost. (LCM)
pg 297
CONSERVATISM RETRAINT
Departure from the cost principle; requires special care to avoid overstating assets and income. pg 297
LOWER OF COST OR MARKET
(LCM) Is a valuation method departing from the cost principle; it serves to recognize a loss when replacement cost or net realizable value drops below cost. pg 297
REPLACEMENT COST
The current purchase price for identical goods. pg 297
NET REALIZABLE VALUE
The expected sales price less selling costs (e.g., repair and disposal costs).
pg 297
INVENTORY TURNOVER RATIO
Inventory Turnover = Cost of Goods Sold/Average Inventory

Reflects how many times average inventory was produced and sold during the period. A higher ratio indicates that inventory moves more quickly through the production process to the ultimate customer, reducing storage and obsolescence costs.
pg 298
DECREASE IN INVENTORY FOR THE PERIOD
Sales are greater then purchases; decrease must be ADDED in computing cash flows from operations. pg 300
INCREASE N INVENTORY FOR THE PERIOD
Sales are less then purchases; increase must be SUBTRACTED in computing cash flows from operations. pg 300
DECREASE IN ACCOUNTS PAYABLE FOR THE PERIOD
Payments to suppliers are greater then new purchases; the decrease must be SUBTRACTED in computing cash flows from operations. pg 300
INCREASE IN ACCOUNTS PAYABLE FOR THE PERIOD
Payments to suppliers is less then new purchases; the increase must be ADDED in computing cash flows from operations. pg 300
LIFO RESERVE
Is a contra-asset for the excess of FIFO over LIFO inventory. pg 302
PERPETUAL INVENTORY SYSTEM
Detailed up-to-date inventory record of 1)units and cost of beginning inventory, 2)units and cost of each purchase, 3)units and cost for the goods of each sale, and 4)units and cost of goods on hand at any point in time. pg 305
PERIODIC INVENTORY SYSTEM
NO up-to-date record of inventory is maintained during the year. A physical count of goods remaining on hand is required at the END OF EACH PERIOD. The number of units is multiplied by their unit cost to compute the dollar amount of the ending inventory. pg 305
INVENTORY FRAUD
Is a common form of financial statement fraud. pg 307
ENDING INVENTORY ERROR
Affects pretax income by the amount of the error and in the next year affects pretax income again by the same amount, but in the opposite direction. pg 307
LIFO LIQUIDATIONS
When a LIFO company sells more inventory then it purchases or manufactures, items from the beginning inventory become part of the cost of goods sold. These lower cost items in beginning inventory produce a higher gross profit, higher taxable income, and higher taxes when they are sold. pg 309
WHAT DO LIFO LIQUIDATIONS CAUSE?
Increase in tax expense (payments). pg 310
HOW TO ELIMINATE TEMPORARY LIFO LIQUIDATIONS
By purchasing additional inventory before year-end. Most companies apply LIFO in this manner. The taxes saved exceed the amount of inventory carrying costs.
pg 311
PURCHASE RETURNS AND ALLOWANCES
Are a reduction in the cost of purchases associated with unsatisfactory goods. They require a reduction in the cost of inventory purchases and the recording of a cash refund or reduction in liability to the vendor.
pg 312
PURCHASE DISCOUNTS
A cash discount received for prompt payment of an account. If payment is made within 10 days from the date of purchase, a 2 percent cash discount is granted.
pg 312
RECORDING A "GROSS METHOD" PURCHASE
After recording the date of purchase, record the date of payment, within the discount period:
1) debit Accounts payable by full dollar amount.
2) credit Inventory by the discount amount (2 percent).
3) credit to Cash the undiscounted amount (98 percent). pg 312