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Chapter 5
Reporting and Analyzing Inventories
32
Accounting
Undergraduate 2
11/16/2008

Additional Accounting Flashcards

 


 

Cards

Term

What is Chapter 5 About?

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Definition
  • It emphasizes accounting for inventory
  • Methods for assigning costs to inventory
  • Items & costs making up merchandise inventory
  • Methods of estimating & measuring inventory

 

Term

Inventory Items

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Definition
·         Merchandise inventory includes all goods that a company owns and holds for sale
Term

If ownership has passed to the purchaser

(goods in transit)

Definition
·         the goods are included in the purchaser’s inventory
Term

If purchaser is responsible for paying freight

(goods in transit)

Definition
 ownership passes when goods are loaded on the transport vehicle
Term

If the seller is responsible for paying freight

(goods in transit)

Definition
ownership passes when goods arrive at their destination
Term

Goods on consignment

 

Definition
·         Goods on consignment are goods shipped by the owner, called the consignor, to another party, the consignee
Term
A consignee
Definition
sells goods for the owner
Term
The consignor
Definition
continues to own the consigned goods and reports them in its inventory
Term

Can damaged good or obsolete goods be counted in inventory if they don't sell???

Definition
NO!
Term
If goods damaged or obsolete are sold at a reduced price........
Definition
they are included in inventory at a conservative estimate of their net realizable time.
Term
Net realizable value
Definition
·         sales price minus the cost of making the sale
Term
The cost of an inventory item includes:
Definition
its invoice cost minus any discount and added or incidental costs (freight, storage, insurance, and costs incurred in an aging process)
Term

The matching principle states

(determining inventory costs)

Definition

that inventory costs should be recorded against revenue in the period when inventory is sold.

Term
FOB DESTINATION
Definition
the ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business
Term
FOB SHIPPING POINT
Definition
the buyer accepts ownership when the goods depart the seller’s place of business.
Term
The physical count is used to...
Definition
Adjust the Inventory account balance to the actual inventory available
Term
Accounting for inventory affects
Definition
both the balance sheet and the income statement
Term

·         Four methods commonly used to assign costs to inventory and to cost of goods sold

Definition
specific identification; FIFO; LIFO; and weighted average
Term
Weighted average cost
Definition
assumes costs flow at an average of the costs available
Term

·         Costs of goods sold plus ending inventory equals

Definition
 cost of goods available for sale
Term
When purchase prices don’t change, each inventory costing method
Definition

·         assigns the same cost amounts to inventory and to cost of goods sold

Term

·         When purchase costs regularly rise

Definition

o   FIFO: assigns the lowest amount to cost of goods sold; has the highest gross profit and net income

o   LIFO: assigns the highest amount to cost of goods sold; the lowest growth profit and net income

o   Weighted average: yields results between FIFO and LIFO

o   Specific Identification: always yields results that depend on which units are sold

Term
      When costs regularly decline
Definition

o  the reverse occurs for FIFO and LIFO

  Weighted average: tends to smooth out erratic changes in costs

o   Specific Identification: exactly matches the costs of items with the revenues they generate

Term
Merchandise inventory is said to be reported on
Definition
the balance sheet at the lower of cost or market (LCM)
Term

the Lower of Cost or Market can be applied in one of three ways

Definition
o   To each individual item separatelyo   To major categories of itemso   To the entire inventory
Term

·         Accounting rules require that inventory be adjusted to market when

 
Definition
market it less than cost
Term
Beginning Inventory + Net cost of purchases – Ending inventory =
Definition
Cost of goods sold
Term
Ending inventory is reported as
Definition
a current asset on the balance sheet
Term
Cost of goods sold is reported on
Definition
the income statement
Term
Advantages of Weighted Average
Definition
Smoothes out price changes
Term
Advantages of FIFO
Definition
Ending inventory approximates current replacement cost
Term
Advantages of LIFO
Definition
Better matches current costs in cost of goods sold with revenue
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