7. Inventory Flashcards
inventory
A tangible resource that is held for resale in the normal course of operations.
Examples of items affecting the cost of inventory would include, but is not limited to, the following:
● ________________
● ________________
● ________________
● ________________
● ________________
Examples of items affecting the cost of inventory would include, but is not limited to, the following:
● purchase price
● taxes or duties paid
● cost of shipping and transit insurance
● labour required to assemble the product
● returns to, allowances from the supplier (including purchase discounts).
perpetual inventory system
Updates the inventory account each time inventory is bought or sold.
periodic (physical) inventory system
Updates the inventory account only at the end of an accounting period.
purchases
An account used to accumulate the cost of all purchases.
transportation-in
An account that accumulates the transportation costs of obtaining the inventory.
purchase returns and allowances
An account that accumulates the cost of all inventory returned to vendors as well as the cost reductions from vendor allowances.
To determine the cost of inventory sold, companies can use one of the following four inventory costing methods.
In Australia, AASB 102 does not permit the use of the third method (______); however, this method is used in other parts of the world, primarily Japan and the US:
● ______________
● ______________
● ______________
● ______________
To determine the cost of inventory sold, companies can use one of the following four inventory costing methods.
In Australia, AASB 102 does not permit the use of the third method (LIFO); however, this method is used in other parts of the world, primarily Japan and the US:
● specific identification
● first-in, first-out (FIFO)
● last-in, first-out (LIFO)
● moving average.
specific identification method
Determines cost of sales based on the actual cost of each inventory item sold.
(FIFO) method
first-in, first-out (FIFO) method
Calculates cost of sales based on the assumption that the first unit of inventory available for sale is the first unit sold.
(LIFO) method
last-in, first-out (LIFO) method
Calculates cost of sales based on the assumption that the last unit of inventory available for sale is the first unit sold.
moving average method
Calculates cost of sales based on the average unit cost of all inventory available for sale.
When a business experiences rising prices for its
inventory, the relative differences will depend on the inventory costing method:
FIFO yields:
ending inventory - ______
cost of sales - ______
LIFO yields:
ending inventory - ______
cost of sales - ______
When a business experiences rising prices for its
inventory, the relative differences will depend on the inventory costing method:
FIFO yields:
ending inventory - highest
cost of sales - lowest
LIFO yields:
ending inventory - lowest
cost of sales - highest
retail method
(also known as….)
gross profit (margin) method
A method of estimating the cost of inventory knowing the selling price and reducing it by the gross profit percentage.
(LCNRV) rule
lower-of-cost-and-net-realisable-value (LCNRV) rule
Requires inventory to be reported on the balance sheet at its market value if the market value is lower than the inventory’s cost.
inventory turnover ratio
Compares cost of sales during a period to the average inventory balance during that period and measures the ability to sell inventory.
Key Formula
inventory turnover ratio
All other things being equal, a higher inventory turnover ratio indicates that the business sold ______ inventory while maintaining ______ inventory on hand.
All other things being equal, a higher inventory turnover ratio indicates that the business sold more inventory while maintaining less inventory on hand.
days-in-inventory ratio
Converts the inventory turnover ratio into a measure of days by dividing the turnover ratio into 365 days.
A periodic inventory system does not update the inventory and cost of sales accounts during the period.
When purchases are made, they are recorded in a temporary account called _______.
When sales are made, the resulting _______ (and increase in assets, cash or accounts receivable) is recorded, but not the __________________.
A periodic inventory system does not update the inventory and cost of sales accounts during the period.
When purchases are made, they are recorded in a temporary account called Purchases.
When sales are made, the resulting revenue (and increase in assets, cash or accounts receivable) is recorded, but not the cost of sales (and the decrease in inventory).
Purchases account
A temporary account that accumulates the cost of all purchases using the periodic inventory system.
Purchase Returns and Allowances account
An account that accumulates the cost of all inventory returned to vendors as well as the cost reductions from vendor allowances.
Purchase Discounts account
An account that accumulates the cost reductions generated from vendor discounts granted for prompt payments.
Which two accounts increase the cost of inventory?
(1) Purchases account
(2) Transportation-in account
Which two accounts reduce the cost of inventory?
(1) The Purchase Returns and Allowances account.
(2) The Purchase Discounts account.
net purchases
The value of:
Purchases +
Transportation-in
–
Purchase Returns and Allowances +
Purchase Discounts
Key Formula
weighted average unit cost
