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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