Accounting 201Chapter 06 Power Point Flashcards
What will you learn from Accounting Chapter 6?
Understanding Inventory and Costof Goods Sold- Recording Inventory Transactions- LOWER-OF-COST-OR-MARKET
Inventory
Includes items a company intends for sale tocustomers. for example, clothes at The Limited,shoes at Payless Shoe Source, building suppliesat Home Depot, and so on.- Also Includes items that are not yet finishedproducts. for instance, lumber at a cabinetmanufacturer, and rubber at a tire manufacturerare part OF Inventory because The firm will usethem to make a finished product for sale tocustomers.
Trace the flow of inventory costs from manufacturing companies to merchandising companies
InventoryMerchandise company or Manufacturing company- Merchandise company goes to Wholesaler or Retailer - Manufacturing company goes to Raw material,Work in progress, or Finished goods
Inventory represents:Cost of goods sold represents:
Inventory represents: The COST OF Inventory not sold.- COST OF Goods Sold represents: The COST OF Inventory sold.- Also referred to as COST OF sales, COST ofmerchandise Sold, OR COST OF products sold.- The costs OF beginning Inventory plusadditional purchases make up The COST ofgoods (OR Inventory) available for sale.- beginning Inventory + purchases = COST OF Goods available for sale which equates to Ending Inventory then COST OF Goods Sold
What are the four means to determine the cost of goods sold and ending inventory? Different inventory cost methods.
Specific Identification- First in, First out. (FIFO)- Last in, First out (LIFO)- Average COST
Define “Specific Identification.”
This method you might think OF as The most logical.- It matches OR identifies each unit OF Inventory with its actual cost.- Practicable only for companies selling unique, expensive products.
Define “First in, first out. (FIFO)”
matches physical flow for most companies.- Results in higher assets and net income when Inventory costs are rising.- Has a balance sheet focus.
Define “Last in, first out (LIFO)”
Results in tax savings when Inventory costs are rising.- Has an income statement focus.
Define a “Prepare a multiple-step incomestatement.”
for merchandising companies, sales and purchases OF Inventory are most important set OF Transactions , companies report revenuesand expenses from these separately from other revenues and expenses.- It makes easier for investors and other financial statement users to determine The profitability OF a company’s Inventory transactions.- Use The information for Incredible to calculate gross profit on The sale and purchase OF inventory.
Define the steps in a “multiple-step incomestatement.”
Net sales $12,000Cost of goods sold $ 8,046Gross profit $ 3,954Selling expenses $ 950 General and administrative expenses $ 804 Operating income $ 2,200Non-operating revenues $ 100 Non-operating expenses ($ 300)Income before income taxes $ 2,000Income tax expense $ 800Net income $ 1,200
Define “the lower-of-cost-or market method” for inventories.
when The value OF Inventory falls below its COST, companies are required to report Inventory at The LOWER MARKET value. and It is considered to be The replacement cost.- Once It Has determined both The COST and MARKET value OF Inventory, The company reports Ending Inventory in The balance sheet at The LOWER OF The two amounts.
Define management of inventory using the inventory turnover ratio and gross profit ratio.
If managers purchase too much Inventory, The company runs The risk OF The Inventory becoming obsolete and MARKET value falling below cost.- Analysts as well as managers often Use The Inventory turnover ratio to evaluate a company’s effectiveness in managing its investment in inventory.- investors often rely on The gross profit ratio to determine The core profitability OF a company’s operations.
Inventory turnover ratio shows the number of times the firm sells its average inventory balance during a reporting period. what’s the math?
Inventory turnover ratio = Cost of goods sold/Average inventory
Average days in inventory indicates the approximate number of days the average inventory is held. What’s the math?
Average days in inventory = 365/Inventory turnover ratio
