Test 3 Flashcards
What is a Perpetual System?
Continuously tracks inventory changes
Beg. Bal. + Purchases - COGS - End. Bal
What is a Periodic System?
Determine ending inventory balance by counting quantity on hand
Beg. Bal + Purchases - End. Inv. = COGS (residual)
When is the title (ownership) passed in FOB Shipping Point?
When shipped
When is the title (ownership) passed in FOB destination?
When received
What costs are included in inventory?
Product - “attach” to inventory (purchase price + freight in + taxes/duties + installation + labor to install)
Period - SGA expensed
Is there a requirement that the cost flow assumption (e.g., FIFO, LIFO, Weighted-Average) adopted must be consistent with the actual physical movement of goods?
No
What is Specific Identification and an example?
Identifying each item sold and each Inter in inventory (e.g., jewelry)
Which cost flow results in lower net income?
LIFO
Which cost flow assumption has higher net income?
FIFO
Why do many companies use LIFO?
Tax/external reporting
Leads to lower net income so lower taxes
What is NRV?
Net Realizable Value
Selling price - $ to complete, disposal, selling
When is NRV usually used as a valuation approach?
Products is available for immediate delivery
Controlled market with quoted price
No significant costs of disposal
EX: mining companies, agriculture companies
When would Relative Sales value be used?
Arises when buying varying units in a lump-sum purchase
EX: block of lots in real estate
When would Purchase Commitments be used?
agreement to buy in the future
EX: timber
What is the difference between a Markup and a Markdown in the Conventional (LCM) method?
Markup - increase in market value
Markdown - decrease in utility value (should be recognized as a loss)
