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Flashcards in Ch 8 Deck (56):


Assets company holds for sale

Or goods consumed in production of goods to be sold


Merchandise concern

Retailer purchases merchandise in form ready for sale

Ex Walmart


Merchandise inventory

Unsold units left in a retail store

Only inventory account that appears in financial statements


Manufacturing concerns

Produce goods to sell to merchandising firms

Have 3 inventory accounts: raw materials, work in process,
Finished good


Raw materials inventory

Cost assigned to goods and materials on hand but
Not yet placed in production

Materials can be traced directly to end product


Work in process inventory

Partially processed units

Costs included in WIP are: cost of raw materials,
direct labor cost and manufacturing overhead


Finished goods inventory

Costs of completed and unsold units on hand


Supplies inventory

Includes materials in production but aren't primary materials
Being processed


Perpetual inventory system

Continuously tracks changes in inventory acct.

Company records all purchases and sales directly
In inventory account as they occur


4 accounting features of perpetual inventory system?

1 purchases of merchandise for resale or raw materials
For production are dr. to inventory

2 freight in dr. to inventory
Purchase returns and allowances, purchase discounts cr.
To inventory

3 Cogs recorded at time of sale dr. COGS + cr. inventory

4 subsidiary ledger records quantity + cost of each
Inventory on hand


Periodic inventory system

Company determines quantity of inventory on hand

Records all acquisitions of inventory during accounting
Period by dr. Purchase acct.


Modified perpetual inventory system

Provides detailed inventory records of increases and
Decreases in quantities only (not $ amts)

Helps determine inventory level at any point in time


All companies need periodic verification of inventory which records by...

Actual, count, weight, measurement and compares
Results to detailed inventory records


Cost of goods available for sale or use, equation?

Cost of goods available for sail or use =
Cost of goods on hand beginning of period
+ Cost of goods acquired or produced during period


Cost of goods sold, equation?

Cost of goods sold =
Cost of goods available for sale
- cost of goods on hand at end of period


3 requirements for valuing inventory?

1 physical goods to include in inventory

2 costs to include in inventory

3 cost flow assumption to adopt


Physical goods to include in inventory, examples?

Who owns the goods?

Goods in transit
Consigned goods
Special sales agreements


Costs. To include in inventory

Product vs period costs


Cost flow assumption to adopt

Specific identification, average cost, FIFO, LIFO, retail etc.


FOB shipping point

Title passes to customer when supplier delivers goods
To the common carrier


FOB Destination

Title passes to customer only when receiving goods
From common carrier


Consignment shipment, consigned good? Consignee, Consignor ?

Consignor ships product (consigned good) to consignee

Consignee acts as agent in selling consigned goods

Consignee sells goods w/out liability except exercise due
Care and reasonable protection from loss or damage til sale


What does a consignee do after it sells a consigned product?

Remits the revenue to the Consignor less the commission
And expenses incurred in accomplishing the sale


Goods out on consignment remain the property of the...



Sales with buy back agreement: product financing arrangement

Enterprise finances it's inventory w/out reporting either
The liability or inventory on its balance sheet

"sale" w/ explicit or implicit "buy back" agreement


Sales with buy back agreement: parking transactions

A Company parks inventory on another B company's
Balance sheet for a short period of time

A Company should report inventory and related liability on
It's books


Sales with high rates of return

Sales should not be recorded until its determined
How much will be returned

Example, returns to publishing company of college text books


How do companies generally account for acquisition of inventories?

Like other assets, on a cost basis


Product costs, how are they recorded?

Costs that attach to the inventory

Product costs recorded in inventory account


Period costs

Indirectly related to acquisition or production of goods

Not included as part of inventory costs


Use of purchase discounts in a periodic inventory system indicates that the company is...

Reporting its purchases and accounts payable at
The gross amount


Gross method

Reports purchase discounts as a deduction from
Purchases on the income statement


Interest costs

Period cost associated for getting inventories ready for sale


Net of the cash discounts

Company records failure to take purchase in discount period
In Purchase Discounts Lost account

Considers purchase discounts lost as financial expense
And reports in "other expenses and losses" section on
Income statement


2 reasons net of cash discounts method is considered better?

1 provides correct reporting of cost of asset related
to liability

2 measures management efficiency by holding
Management responsible for discounts not taken


There is no requirement that the cost flow assumption adopted be..

Consistent with physical movement of goods


Specific identification

Identifying each item sold and each item in inventory

Cost flow matches physical flow of goods under
Specific identification


Average cost method

Prices items in inventory on basis of average cost
Of all similar items available during period


Moving average method

New average unit cost is computed when each
new purchase Is made


FIFO Method

Assumes company uses goods in order of in which
It purchases them


In all cases where FIFO is used, the inventory and
Cost of goods sold would...

Be the same at end of the month
Whether a perpetual or periodic system is used



Matches cost of last goods purchased against revenue


LIFO Reserve

Difference btw inventory method used for
internal reporting purposes And LIFO

Called "Allowance to reduce inventory to LIFO ACCT"


LIFO Effect

Change in allowance balance from one period to next


2 disadvantages to specific goods costing approach of LIFO?

1 company with many different inventory items has
Expensive accounting costs to track them

2 LIFO Liquidation


LIFO Liquidation, 2 effects it has?

Erosion of LIFO inventory

Distorts net income + leads to substantial tax payments


Specific goods pooled LIFO approach?
How does it compare to specific goods LIFO approach?

Groups similar inventory products

Results in fewer LIFO liquidations compared to
Specific goods LIFO approach


The dollar value LIFO method determines and measures any...

Increases and decreased in pool in dollar value

No measure of physical quantity of goods in inventory


What do companies use to measure inflation for LIFO purposes?

Consumer price index for urban consumers


Price index for current year, equation? What is another name for this method?

Price index for current year =
(ending inventory for period at current cost)/
(ending inventory for period at base year cost)

The double extension method


What LIFO system do most companies use?

Dollar value LIFO


3 major advantages of LIFO?

1 matching

2 tax benefits/improved cash flow

3 future earnings hedge


LIFO conformity rule

If company uses LIFO for tax purposes, it must also
Use LIFO for financial accounting purposes


4 major disadvantages of LIFO?

1 reduced earnings
2 inventory understated
3 physical flow
4 involuntary liquidation/poor buying habits


2 circumstances that lead to the preferability of selecting LIFO?

1 Selling prices and revenues have increased faster
than costs, this distorting income

2 situations where LIFO is traditionally used like
Department stores and industries with constant base stock
(refining, chemicals, glass)


LIFO Is inappropriate in following 3 circumstances?

1 prices lag behind costs

2 specific identification is traditional (art, jewelry, cars)

3 where unit costs decrease as production increases
Eliminating tax benefits of LIFO