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Flashcards in Chapter 6 powerpoint Deck (32):
1

Merchandiser inventory classication

merchandise inventory

2

Three manufacturer inventory classifications

Finished goods inventory

work in process

raw materials

3

finished goods inventory

maunfactured items that are completed and ready for sale

4

work in process

manufactured inventory items that are completed and ready for sale

5

Raw materials

The basic goods that will be used in production, but have not been placed into production

6

Just in time inventory (JIT)

Companies manufacture or purchase goods just in time for use

7

Two reasons to count physical inventory in a periodic system

To determine the inventory on hand at the balance sheet date

To determine the cost of goods sold for the period

8

Two steps in taking a physical inventory count

1. Taking a physical inventory of goods on hand

2. determining the ownership of goods

9

FOB shipping point

buyer pays freight costs

ownership goes to buyer once given to mail carrier

10

FOB destination

Seller pays freight costs

ownership goes to buyer when mail carrier drops off goods to buyer

11

Consigned goods

Goods of other parties that agree to be sold with a fee, but without taking ownership of goods

12

Inventory

assets that will be resold

13

Cost of inventory

all the costs incurred to build the inventory

eg. factory, machinery, labor

14

Inventory and COGS

all costs necessary to acquire the inventory

15

Costs related to the sale

Not required for inventory acquisition should be classified as selling expenses and NOT in inventory

ex. freight-out

16

Lower of Cost or Market

US GAAP requires that all inventory be measured at lower of cost or market (replacement cost)

DOES NOT ALLOW upward revaluation of inventory

*consistent with conservatism

17

Specific Identification

When a company can positively identify which particular units it sold and which are still in ending inventory

Keep records of original costs

Sells a limited variety of high-cost items

18

In periods of increasing prices, what records highest net income?

FIFO

19

In periods of decreasing prices, what reports the highest net income?

LIFO

20

In periods of increasing prices, costs allocated to ending inventory using FIFO will __________________

approximate current costs

21

In periods of increasing prices, costs allocated to ending inventory using LIFO will ___________________

be significantly understated

22

LIFO reserve helps what?

to enhance comparability across companies, as users of financial statements can see difference in two inventory methods

23

lower taxes?

LIFO during increasing prices

24

Inventory Turnover Ratio

Cost of Goods Sold / Average Inventory

An indication of how quickly a company sells its good

higher = better

25

Days in inventory

365 days / Inventory Turnover Ratio

Measures average number of days inventory is held

Lower is better

26

Average inventory formula

(Beginning inv. + Ending inv.) / 2

27

Understate Beginning inventory:

COGS = understated

Net income = overstated

28

Overstate beginning inventory

COGS = Overstated

Net income = understated

29

Understate ending inventory

COGS = overstated

Net income = understated

30

Overstate ending inventory

COGS = understated

Net income = overstated

31

Ending inventory overstated (balance sheet)

Assets = overstated

Liabilities = no effect

SE = Overstated

32

Ending inventory understated (Balance Sheet)

Assets = understated

Liabilities = No effect

SE = understated