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Flashcards in Ch 9 Deck (49):
0

How do companies record inventories that lose value?

Company abandons historical cost principal
When revenue producing ability drops

Report inventories at lower-of-market-cost each period

1

How does IFRS and. GAAP define "market"

IFRS market = net realizable value

GAAP market = replacement cost subject to certain
constraints

2

Market

Cost to replace item by purchase or reproduction

Companies value goods at cost or cost to replace,
Whichever is lower

3

Cost of inventory

Acquisition price of inventory computed using historical
Cost methods (FIFO, LIFO etc.)

4

A company should charge a loss of utility (ability to produce revenues) Against revenues...

In the period when the loss occurs, not in period of sale

5

Lower-of-cost-or-market method is considered what kind of approach to inventory valuation?

Conservative approach

6

Net realizable value (NRV)

Estimated selling price in ordinary course of business,
Less reasonably predictable costs of completion
And disposal

7

General lower-of-cost-or-market rule: company values inventory at the lower-of-cost-or-market, with...

Market limited to amount no more than net realizable value

Or less than net realizable value less normal profit margin

8

Upper limit (ceiling), lower limit (floor)

Net realizable value of inventory

LL: net realizable value less normal profit margin

9

IFRS, determining market?

IFRS does not use ceiling or floor to determine market

10

Designated market cost

Amount company compares to cost

Always middle value of replacement cost, net realizable
value and net realizable value less normal profit margin

11

Recording market instead of cost: Cost of goods sold method

Debits cost of goods sold for the write down of inventory
To market

12

Recording market instead of cost: Loss method

Debits loss acct. for write down of inventory to market

13

4 Conceptual deficiencies of lower cost market rule?

1 decreases in value of asset charged in period
of loss of utility, increases of asset recognized in point
of sale

2 inconsistency as rule may lead to value of inventory
at cost in 1 year and at market the next year

3 effect on balance sheet conservative, effect on income
Statement may not be

4 normal profit = past experience measure so may
Be used for income manipulation

14

Lump-sum purchase AKA Basket purchase

Company buys group of units in single purchase

15

Relative sales value

Allocate value of each unit by on basis of relative sales value
Per unit

16

Purchase commitments

Agreements to buy inventories weeks, months or
Years in advance

17

If a contract price is greater than market price and the buyer expects losses will occur when the purchase is effected in purchase commitments...

How should this be accounted for?

Company should recognize losses in periods where
Declines in market prices take place

18

Hedging, Purchaser in purchase commitment...

simultaneously Enters into contract which agrees to
sell in future Same quantity of same goods at fixed price

Company holds buy position in purchase commitment
And sell position in futures contract in same commodity

19

3 assumptions of Gross Profit Method AKA Gross margin method?

1 beginning inventory + purchases
= total goods to be accounted for

2 goods Not sold must be on hand

3 sales reduced to cost
deducted from (opening inventory + purchases)
= ending inventory

20

Gross profit percentage

percentage of selling price

21

Gross profit equation?

Cost + gross profit = selling price

22

Retailer formula: gross profit on selling price

Gross profit on selling price =
(% markup on cost)/(100% + percentage markup on cost)

23

Retailer equation: Percentage markup on cost equation

% markup on cost =
(Gross profit on selling price)/(100% - gross profit on selling price)

24

3 major disadvantages of gross profit method for inventory?

1 provides an estimate
2 uses past percentages
3 blanket (widely varying) gross profit rate is inaccurate

25

3 items retail inventory method keeps record of?

1) total cost and retail value of goods purchased

2) total cost and retail value of goods available for sale

3) sales for period

26

Cost-to-retail ratio

Cost-to-retail ratio =
total goods available for sale (at cost)
/total goods available at retail price

27

Retail inventory method is advantageous (3 ways) because it can...

Approximate inventory balance without physical count,
Estimate losses, serve as control device


28

Retail Inventory method is useful for interim reports because such reports usually need..

Quick and reliable measure of inventory

29

Control device

Helps company explain deviations from physical count
At end of year

30

Markup

Additional markup of original retail price

31

Markup cancellations

Decreases in price of merchandise that retailer had
Marked up above original retail price

32

Markdowns

Decreases in original sales prices

Used in competitive markets

33

Markdown cancellations

Occur when markdowns are later offset by increases
In prices of goods that retailers had marked down

34

Value of ending inventory equation?

Value of ending inventory = ending inventory at retail X cost ratio

35

Conventional retail inventory method AKA Lower-of-cost-or-market approach

Cost ratio using markups but not mark downs

Approximates lower-of-average-cost-or-market ratio

36

Comprehensive conventional retail inventory method format:
Cost-to-retail ratio equation?

Cost-to-retail ratio =
Cost of goods available/
original retail price of goods available, + net mark ups

37

How are freight costs treated in retail method?

Part of purchase costs

38

How are purchase returns treated in the retail method?

Ordinarily considered as reduction of price at both
cost and retail

39

How are purchase discounts and allowances treated using the retail method?

Considered as reduction of cost of purchases

40

Retail method: treatment of sales returns and allowances?

Considered proper adjustments to gross sales

41

When sales are considered gross, under the retail method, companies...

Don't recognize sales discounts

42

Retail method: transfer in from another department

Reported in same way as purchases from outside company

43

Retail method: normal shortages

Deduction in retail column

44

Retail method: abnormal shortages

Deducted from both the cost and retail columns

Reported as special inventory amount or as loss

45

Retail method: Employee discounts

Deducted from retail column

46

One noticeable characteristic of retail inventory method is?

Has an averaging effect on varying rates of gross profit

47

Inventory turnover, definition, equation?

Measures # of times on avg. a company sells the inventory
During the period, measures liquidity of inventory

Inventory turnover = cost of goods sold/avg. inventory

48

Avg. days to sell inventory

Represents avg # of days in year to sell inventory

= 365/inventory turnover