Financial Accounting Ch 7 Libby

Front 1

INVENTORY

Back 1

Tangible property held for sale in the normal course of business, or used in producing goods or services for sale. pg 284

Front 2

MERCHANDISE INVENTORY

Back 2

Includes goods held for sale in the normal course of business. pg 284

Front 3

RAW MATERIALS INVENTORY

Back 3

Includes items acquired for the purpose of processing into finished goods. pg 284

Front 4

WORK IN PROGRESS (WIP) INVENTORY

Back 4

Includes goods in the process of being manufactured. pg 284

Front 5

FINISHED GOODS INVENTORY

Back 5

Includes manufactured goods that are complete and ready for sale. pg 284

Front 6

DIRECT LABOR

Back 6

Refers to the earnings of employees who work directly on the product being manufactured. pg 286

Front 7

FACTORY OVERHEAD

Back 7

Manufacturing costs that are not raw material or direct labor costs. pg 286

Front 8

GOODS "AVAILABLE" FOR SALE

Back 8

The sum of beginning inventory and purchases (or transfers to finished goods) for the period. pg 287

Front 9

COST OF GOODS SOLD EQUATION

Back 9

BI + P - EI = CGS

biginning inventory + purchases - ending inventory = cost of goods sold.
pg 287

Front 10

SPECIFIC IDENTIFICATION METHOD

Back 10

Identifies the cost of the specific item that was sold.
pg 289

Front 11

FIFO

Back 11

First-in, first-out method assumes that the first goods purchased (the first in) are the first goods sold. pg 290

Front 12

LIFO

Back 12

Last-in, first-out method assumes that the most recently purchased units (the last in) are sold first.
pg 292

Front 13

AVERAGE COST METHOD

Back 13

Uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory. pg 292

Front 14

INCOME STATEMENT IS AFFECTED BY?

Back 14

Cost of goods sold. (COGS)
pg 294

Front 15

BALANCE SHEET IS AFFECTED BY?

Back 15

Inventory pg 294

Front 16

WEIGHTED AVERAGE COST METHOD

Back 16

Generally gives income and inventory amounts that are between the FIFO and LIFO extremes. pg 293

Front 17

"INCREASING COST" INVENTORIES

Back 17

For inventories with increasing costs, LIFO is used on the tax return because it normally results in lower income taxes.
pg 294

Front 18

"DECREASING COST" INVENTORIES

Back 18

For inventory with decreasing costs (most common), FIFO is most often used for both the tax return and financial statements.
pg 295

Front 19

WHEN UNIT COSTS ARE RISING..?

Back 19

LIFO produces lower income and and lower inventory valuation then FIFO. pg 294

Front 20

WHEN UNIT COSTS ARE DECLINING...?

Back 20

LIFO produces higher income and higher inventory valuation then FIFO. pg 294

Front 21

LEAST-LATEST RULE

Back 21

Managers prefer to pay the least amount of taxes allowed by law as late as possible. pg 294

Front 22

CONSISTENCY IN USE OF INVENTORY METHODS

Back 22

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

Front 23

LCM RULE

Back 23

This rule is known as measuring inventory at the Lower of Cost or Market.
pg 297

Front 24

COST PRINCIPLE

Back 24

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

Front 25

VALUE OF DAMAGED, OBSOLETE, OR DETERIORATED GOODS

Back 25

The current estimated net realizable value (sales price less costs to sell) if that is below cost. (LCM)
pg 297

Front 26

CONSERVATISM RETRAINT

Back 26

Departure from the cost principle; requires special care to avoid overstating assets and income. pg 297

Front 27

LOWER OF COST OR MARKET

Back 27

(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

Front 28

REPLACEMENT COST

Back 28

The current purchase price for identical goods. pg 297

Front 29

NET REALIZABLE VALUE

Back 29

The expected sales price less selling costs (e.g., repair and disposal costs).
pg 297

Front 30

INVENTORY TURNOVER RATIO

Back 30

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

Front 31

DECREASE IN INVENTORY FOR THE PERIOD

Back 31

Sales are greater then purchases; decrease must be ADDED in computing cash flows from operations. pg 300

Front 32

INCREASE N INVENTORY FOR THE PERIOD

Back 32

Sales are less then purchases; increase must be SUBTRACTED in computing cash flows from operations. pg 300

Front 33

DECREASE IN ACCOUNTS PAYABLE FOR THE PERIOD

Back 33

Payments to suppliers are greater then new purchases; the decrease must be SUBTRACTED in computing cash flows from operations. pg 300

Front 34

INCREASE IN ACCOUNTS PAYABLE FOR THE PERIOD

Back 34

Payments to suppliers is less then new purchases; the increase must be ADDED in computing cash flows from operations. pg 300

Front 35

LIFO RESERVE

Back 35

Is a contra-asset for the excess of FIFO over LIFO inventory. pg 302

Front 36

PERPETUAL INVENTORY SYSTEM

Back 36

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

Front 37

PERIODIC INVENTORY SYSTEM

Back 37

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

Front 38

INVENTORY FRAUD

Back 38

Is a common form of financial statement fraud. pg 307

Front 39

ENDING INVENTORY ERROR

Back 39

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

Front 40

LIFO LIQUIDATIONS

Back 40

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

Front 41

WHAT DO LIFO LIQUIDATIONS CAUSE?

Back 41

Increase in tax expense (payments). pg 310

Front 42

HOW TO ELIMINATE TEMPORARY LIFO LIQUIDATIONS

Back 42

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

Front 43

PURCHASE RETURNS AND ALLOWANCES

Back 43

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

Front 44

PURCHASE DISCOUNTS

Back 44

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

Front 45

RECORDING A "GROSS METHOD" PURCHASE

Back 45

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