Chapter 6 Flashcards

1
Q

an owner of inventory goods who ships them to another party who will then find a buyer and sell the goods for the owner the consignor retains title to the goods while they are held offsite by the considnee

A

consignor

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2
Q

consignee

A

one who receives and holds goods owned by another party for the purpose of acting as an agent and selling the goods for the owner the consignee gets paid a fee from consignor for finding a buyer

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3
Q

What is NRV

A

Net realizable value

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4
Q

what is the definition of NRV

A

the expected sales price of an item minus the cost of making the sale

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5
Q

the selling price of merchandise inventory

A

retail price

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6
Q

cost of inventory cacluations

A

purchase price minus discounts provided by supplier ( trade discounts/rebates) + additional costs necessary to put inventory in a place and condition for sale = cost of inventory

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7
Q

examples of additional incidental costs that are to be added to inventory

A
  • import duties
  • transportation-in (freight costs)
  • storage
    -insurance
    -handling costs
  • costs incurred in an aging process where the aging contributes to the value of the product produced ( for example aging of wine and cheese)
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8
Q

what does accounting principles imply

A

the incidental costs are assigned to every unit purchased - this is so that all inventory costs are properly matched against revenue in the period when inventory is sold

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9
Q

materiality principle

A

states that an amount may be ignored if its effect on the financial statements is not important to their users. Financial statement preparers need to assess whether the item would impact the decision of a user

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9
Q

what does materiality principle rely on

A

relied on by some companies as the reason some incidental costs are not allocated to inventory

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10
Q

physical inventory count

A

to count merchandise inventory for the purpose of reconciling goods actually on hand to the inventory control account in the general ledger; also called taking an inventory

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10
Q

internal controls

A

the policies and procedures used to protect assets, ensure reliable accounting, promotes efficient operations, and urge adherence to company policies

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11
Q

COGS caculations

A

beginning inventory + purchases minus ending inventory = COGS

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12
Q

what is FIFO

A

First-in, first-out

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13
Q

what are the three key methods that are used in assigning costs to inventory and cost of goods sold under perpetual inventory system

A
  • First-in, first-out FIFO
    -moving weighted average
  • specific identification
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14
Q

what does FIFO mean

A

the pricing of an inventory under the assumption that inventory items are sold in the order acquired; the first items received are the first items sold

15
Q

what is moving weighted average

A

a perpetual inventory pricing system in whick the unit cost in inventory is recalculated at the time of each purchase by dividing the total cost of goods available for sale at that point in tie by the corresponding total units available for sale the most current moving weighted average cost per unit is multiplied by the units sold to determine cost of goods sold

16
Q

specific identification

A

the pricing of an inventory where the purchase invoice of each item in the ending inventory is identified and used to determine the cost assigned to the inventory

17
Q

the consistency principle

A

the accounting requirement that a company use the same accounting policies period after period so that the financial statements of succeeding periods will be comparable

18
Q

do companies have to use one method

A

no the consistency principle does not require a company to use one method exclusively

19
Q

principle of faithful representation

A

the accounting principle that requires information to be complete, neutral, unbiased, and free from error

20
Q

what is LCNRV

A

lower of cost and net realizable value

21
Q

what does LCNRV mean

A

the required method of reporting merchandise inventory in the balance sheet where net realizable value is reported when net realizable value is lower than the cost. This rile ensures inventory is not recorded at a higher value on the balance sheet than what the company cal sell the item for

22
Q

how is LCNRV applied

A
  1. usually item by item, or , when not practicable
  2. to groups of similar or related items
23
Q

what is the accounting equation

A

assets= liabilities + equity

24
Q

what cause an understate ending inventory

A

understated assets and understated equity

25
Q

what causes overstated ending inventory

A

overstated assets and overstated equity

26
Q

what is gross profit method

A

an estimate used for determining ending inventory in the event inventory is destroyed. The companies determining gross profit rate is used to estimate COGS which is them subtracted from the cost of goods available for sale to determine the estimated ending inventory

27
Q

gross profit ratio

A

measures how much of net sales is gross profit ( net sales minus COGS) calculated as gross profit divided by net sales; also know as the gross margin ratio

28
Q

what is the quick method to estimate ending inventory using the gross profit method

A

step 1. calculate Cost of goods available for sale = inventory + purchases example: 12,000+20,500=32,500

Step 2. deduct COGS = net sales x COGS% = difference = estimated ending inventory
example: 30,000*(1-0.30)=21,000 - 21,000 = 11,500

29
Q

retail inventory method

A

a method used by retailers to estimate an ending inventory cost based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at marked selling prices

30
Q

Inventory turnover

A

a financial statement analysis tool used to determine the number of times a company’s average inventory was sold during an accounting period, calculated by dividing COGS by the average merchandise inventory balance;

31
Q

Day’s sales in inventory

A

a financial analysis tool used to estimate how many days it will take to convert the inventory on hand into accounts receivable or cash; calculated by dividing the ending inventory by cost of goods sold and multiplying the result by 365