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23 Cards in this Set
- Front
- Back
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Consigned goods |
When one party holds the goods of another party to try and sell the G for them for a fee but without taking ownership Ex. Car dealer selling you car in the lot but doesn't own car |
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Cost Flow Assumptions & 3 Methods |
Making assumptions about which units were sold -Assume flows of costs that may be unrelated to the actual physical flow of goods 1) First in, First out (FIFO) 2) Last in, First out (LIFO) 3) Average cost *Few companies use perpetual LIFO, FIFO, or average-cost to cost their inventory* |
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First in, First out (FIFO) |
*Earliest goods purchased are first to be sold* - Good to sell oldest units first so works best - Companies determine the cost of ending inventory by taking the unit cost of the most recent purchase and WORKING BACKWARD until all units of inventory have been costed |
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Last in, First out (LIFO) |
*Latest goods purchased are the first to be sold* -Costs of the latest goods purchased are the first to be recognized in determining C.G.S -Companies obtain the cost of the ending inventory by taking the unit cost of the earliest good available and WORKING FORWARDS until all units of inventory have been costed |
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Average cost method |
Allocates the cost of goods available for sale on the basis of the weighted- average unit cost incurred - *Cost of goods available / total units available for sale = Weighted average unit cost* - 12000 / 1000 = $12.00 *CGS= Units sold x Weighted-average unit price* |
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Lower of cost or market (LCM) |
A basis where by inventory is stated at the lower of either its cost or market value as determined by current replacement costs -ex. of convention of conservatism- The approach adopted among accounting alternatives is the method that is least likely to overstate assets and net income |
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Current replacement costs |
Cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities -Used bc a deadline in the replacement cost of an item, usually leads to a decline in the selling price of the item |
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FIFO/LIFO Tax Effects
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-LIFO results in the lowest income taxes during time of increased prices -FIFO results in increase in price & net income but decrease in CGS |
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Income statement effects for FIFO and LIFO |
For increasing prices, FIFO reports higher net income For decreasing prices, LIFO reports higher net income |
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Merchandising Company Interest |
Merchandising inventory- good bought with intension to sell |
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Manufacturing Company inventories (3) |
1) Raw materials inventory
2) Work in progress inventory 3) finished goods inventory *Companies report all inventories under Current Assets on the balance sheet* *Quantity (# of units) x Per unit cost= Total cost* |
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Physical Inventory Count- Perpetual system |
-Check accuracy of records -Determine inventory lost due to...shoplifting |
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Physical Inventory Count- Periodic system |
-Determining inventory on hand -Determining the C.G.S for the period |
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Physical Inventory count is taken: |
When business is closed or slow At the end of the accounting period |
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Consignment |
Having possession of a good but not ownership Consignees: Physically hold the goods Consigners: Owner of a G someone (consignee) else is holding for you |
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Overstating inventory |
*If overstating inventory, you understate CGS* |
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Lower-of-cost-or-market |
When the value of inventory is lower than its cost Companies can "write down" the market value of their inventory during that period that the price decline occurs market value- Replacement cost -Ex. Of conservatism |
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Example Of conservatism |
If cost of good is higher than the market cost, then you write down the market cost Cost Market Lower C of M Flat TV 2000 1800 1800 Radios 700 900 700 Total inv. 2700 2700 2500 -High Inventory levels = Loss of sales -Low Inventory levels = Loss of sales |
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Inventory Turnover Ratio
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*CGS / Average inventory* -Big ratio means efficient -Too big can mean inefficient *Means minimal funds tied up in inventory on hand* |
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Days in Inventory |
*365 / Inventory Turnover ratio* - Don't want to big Ex. 2011 2010 Ending Inventory 36,318 32,713 CGS 315,287 Inventory turnover= 315,287 /((36318+32713))/2) = 9.1 times. Days in inventory (365/9.1) = 40.1 days |
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LIFO Reserve |
The difference between inventory using LIFO and FIFO - LIFO inventory + LIFO reserve= FIFO inventory or - FIFO inventory - LIFO inventory= LIFO reserve |
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LIFO Reserve adjustments |
Inventory error CGS Net income Starting understaded | Understated| Overstated Starting overstated | Overstated | understated Ending understated | Overstated | understated Ending overstated | Understated | overstated *error in ending inventory will have a reverse effect on net income of next period, so it will be fixed* |
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Adjustments with errors |
1) Ending inventory error 2) A 3) L 4) S.E. 1)overstate 2)overstate 3)No effect 4)overstated 1)understate 2)understate 3)no eff 4)understate |
