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Flashcards in Chapter 6 Deck (36):
1

Three categories of inventory

Finished goods inventory

Work in process

Raw materials

2

Finished goods inventory

Manufactured items that are completed and ready for sale

3

Work in process

The portion of manufactured inventory that has begun the production process but is not yet complete

4

Raw materials

The baic goods that will be used in production but have not yet been placed into production

5

Hepful hint: inventory classification

Regardless of the classification, companies report all inventories under Current Assets on the balance sheet

6

Just-in-time (JIT) inventory

Companies manufacture or purchase goods just in time for use

ex. Dell

7

Ethics note: salad oil company

Filled storage tanks with water so auditors thought they were full of oil

repainted numbers too

8

Ownership during FOB shipping point

ownership passes to the buyer when the public carrier accepts the goods from the seller

- buyer pays freight costs

9

Ownership during FOB destination

Ownership remains with the seller until thegoods reach the buyer

seller pays freight costs

10

Consigned goods

Goods held for sale by one party although ownership of the goods is retained by another party

ex. a company is selling my car for a fee

11

Ethic Note: disadvantage of specific identification

Management can manipulate net income

Boost net income by selling units bought at low cost

or reduce by selling units bought at high cost

12

Specific identification

An actual physical flow costing method in which items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory

13

First in, First out (FIFO) method

An inventory costing method that assumes that the earliest goods purchased are the first to be sold

14

Helpful hint: FIFO

Another way of thinking about FIFO ending inventory is the LISH assumption

"Last is still here"

15

LIFO

An inventory costin gmethod that assumes the latest units purchased are the first to be sold

alternative: FISH "First is still here"

16

Average-cost method

An inventory costing method that uses weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold

COGS/Total Units Avilable for Sale = Weight Average Unit Cost

17

Companies can use _________________ under GAAP

all three assumed cost flow methods

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REasons for different inventory cost flow methods

1. Income statement effects

2. Balance sheet effects

3. Tax effects

19

When prices are rising, companies prefer ______________

FIFO because it results in higher net income

20

Helpful hint: LIFO and taxes

LIFO conformity

If companies use LIFO for taxe purposesm they must also use it for financial purposes

21

LIFO _____________ the quality of earnings ratio

increases

higher net cash from operating activities

lower net income

22

Lower-of-cost-or-market

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost

23

Current replacement cost

The cost of purchasing the same goods at the present time form the usual suppliers in the usual quantities

24

Concept of conservitism

The best choice among accounting alternatives is the method that is least likely to overstate assets and net income

25

International Note: write-downs

Under GAAP - companies cannot reverse inventory write-downs if inventory increases in value in subsequent periods

IFRS - permits companies to reverse write-downs in some circumstances

26

Inventory turnover ratio

Cost of Goods Sold

Average Inventory

*Indicates how quickly a company sells its goods

27

Days in inventory

365

Inventory Turnover Ratio

*indicates the average number of days inventory is held

28

LIFO reserve

For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO

29

Moving average method

Company computes a new average after each purchase for unit costs

30

Beginning inventory understated

Cost of goods sold: understated

Net income: overstated

31

Beginning inventory overstated

Cost of Goods Sold: Overstated

Net income: Understated

32

Ending inventory understated

Cost of Goods Sold: Overstated

Net income: Understated

33

Ending inventory overstated

Cost of Goods Sold: Understated

Net income: Overstated

34

Ending inventory error: Overstated

Assets: Overstated

Liabilities: No effect

Stockholder's equity: overstated

35

Ending inventory error: Understated

Assets: Understated

Liabilities: No effect

Stockholders' Equity: Understated

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