Shared Flashcard Set

Details

ch. 4
inventory and cost of goods sold
23
Accounting
Graduate
12/12/2012

Additional Accounting Flashcards

 


 

Cards

Term
revenues generated from selling goods are called _____.
Definition

sales.

p.70

Term
cost of goods sold are the expenses incurred in the _______ of goods.
Definition

purchase or production

p.70

 

Term
what are the two acceptable approaches to account for the production an sale of merchandise?
Definition

perpetual inventory system and periodic inventory system

p.71

Term
in a perpetual inventory system, the Inventory account and COGS  are constantly updated OR brought up to date at the reporting period while in the period inventory system, those accounts are constantly updated OR brought up to date at the reporting period.
Definition

in a perpetual inventory system, the Inventory account and COGS  are constantly updated while in the period inventory system, those accounts are obrought up to date at the reporting period.

p.71-73

Term
what is the difference in the entry when you purchase/produce inventory if you are using the perpetual system as opposed to the periodic system?
Definition

perpetual:

inventory       $1,000

       Cash                   $1,000

 

 

periodic:

Purhcase         $1,000

       Cash                   $1,000       

Term
what is the difference in the entry when you sell inventory if you are using the perpetual system as opposed to the periodic system?
Definition

no difference.  both record

Cash                 $2,000

      Sales                          $2,000

 

but an extra entry is made for the COGS as sales are made.

Term
what are some of the extra entries you make in a perpetual system that you don't make in a periodic system?
Definition
  1. upon sale of goods, an entry is made to reflect the cost of goods being sold.
COGS               $500
    Inventory                  $500
  1. it is also customary to indicated the quanity of goods being added or sold from the inventory, so that you record the physcial quantity of goods on hand in inventory.  this step is usually taken care by preparation of a special inventory journal.
Term
what does it mean to conduct a "physical inventory" ?
Definition

it means to physically count how many goods you have.

p.72

Term
what is "inventory shrinkage" and what is the entry for it look like?
Definition

any discrepancy between the physcial count of inventory with what would be expected based on journal entries, caused by theft, waste, etc.

 

 COGS               $xxx

        Inventory            $xxx

Term
since COGS is not recorded as they occur in the periodic system, how we do go about calculating it?
Definition
  1. conduct a physical inventory at the end of the reporting period to figure out the cost of inventory deteremined to be on hand.  this is known as the ending inventory.  this number is also the ending balance to be reported in the Inventory account on the B/S.
  2. COGS = BI + P - EI

 BI can be read of fthe blanace sheet from the prior period

P is summarized from all the purchases/production journal entries

EI is based on the physical count of inventory

 

 

Term
what is "COGS = BI + P - EI" in book keeping terms?
Definition

COGS                    $xxx

      BI                             $xxx

 

COGS                    $yyy

     Production                  $yyy

 

EI                        $zzz

     COGS                        $zzz

Term

what are the advantages of the perpetual system?

what are the advantage of a periodic system?

Definition

perpetual--more advantageous from managing perspective because the level of inventory and COGS is known every moment so it can enable you manage inventory more efficiently.

 

periodic--it doesn't require keeping track COGS so it's an advantage from a bookkeeping perspective. it might be unduly burdensome to try to keep track of all goods sold accoridng to cost. however, technology has alleviated this burden (bar codes)

Term
what are the two different methods of determining the cost of goods sold for a period when those costs vary?
Definition
specific identification method (actual cost of each item is specifically identified) and cost flow assumption methods (LIFO/FIFO/average)
Term
what are the different consequences in the balance sheet and the income statement when using LIFO or FIFO?
Definition

balance sheet consequence:  the ending inventory is different (LIFO is lower, FIFO is higher)

 

income statement consequence:  the gross profit is different (LIFO has a higher COGS, FIFO has a lower COGS therefore LIFO has a lower GP and FIFO has a higher GP)

Term
how do you calculate gross profits from sales?
Definition
GP = S - COGS
Term
what is the phenomenon referred to as "LIFO liquidation"?
Definition

because LIFO's balance sheet reflects the historical costs , so if the entity starts to sell inventory at higher quantities than the amount listed on the balance sheet, then its reported income in respect of those sales will be burdened by those outdated costs and producing artificially high income.

p.84

Term
what subsidary princple was created to implement the principle of conservatism when recording COGS?
Definition

the lower of cost or market principle.  LCM requires the inventory be reported at cost or at market vaue if that market value is lower.

p.84

Term
for LCM, how do you determine the market value for inventory?
Definition
  1. replacement cost

BUT

 

replacement cost cannot exceed the inventory's net realizable value (selling price - selling cost)

 

AND 

 

it cannot be lower than net realizable value - normal profit

Term

what is the COGS that should be used?

 

inventory at cost  $10

replacement cost $10

selling price  $14

selling costs  $6

Definition

historical cost and replacement cost both 10.

 

but. net realizable value is 8 (14 - 6), and the cost cannot exceed the net realizable value, so would use 8.

Term

what is the COGS that should be used?

 

inventory at cost  $15

replacement cost $10

selling price  $20

selling costs  $5

normal selling profit $2

Definition

LCM tells you that you would use $10 rather than $15.

but, it cannot exceed net realizable value, which is $15 (20-5), so using $10 is ok.

but, it also cannot be lower than net realizable value less normal selling profit, which is $13.  

 

so you would use 13.

Term
what are some other cost considerations when an entity converts raw material into finished goods?
Definition

the entity may need to measure these production costs (aka conversion costs).  this consists of:

  • cost of materials
  • cost of labor
  • related overhead
Term
what is "cost accounting" ?
Definition
the process of assigning production costs to goods.
Term
in cost accounting, what is the difference between product cost and period cost?
Definition

product costs are those directly associated with the goods, such as direct materials and direct labor.

period costs are those associated with teh general manufacturing and sales effort and are expenses as incurred.

 

e.g. overhead is an example that may be both a product cost (inventory and COGS) and period cost (heating bills for sales office).

 

p.86

Supporting users have an ad free experience!