ACCT Ch 7

Question 1

Inventory Definition

Answer 1

inventory is on balance sheet because it can be converted into cash within one year; inventory includes two types of inventory such as Merchandise and Manufacturing; and is a tangible property that is
1) held for sale in the normal course of business
or
2) use to produce goods or services for sale

Question 2

Merchandise Inventory Definition

Answer 2

costs included the sum of cost incurred in bringing an article to usable or salable condition and location
1. Invoice price
2. Freight in (NOT Freight out)
3. Inspection costs
4. Preparation costs
5. Subtract out purchase returns and allowances or purchases discounts (note: this is different than the “sales discounts” we learned about in Ch 6)

Question 3

Understated Definition

Answer 3

means a reported amount is less than the actual

Question 4

Overstated Definition

Answer 4

means a reported amount is more than the actual

Question 5

Manufacturing Inventory

Answer 5

Think Ford Selling Cars; it includes
1. Raw Materials
2. Work in process - goods in the process of being manufactured
2a. Direct labor cost - earnings of employees who work directly on products being manufactured. Note: this is not for the office accountant’s salary
2b. Factoring overhead costs - heat, light, and power to operate the factory
3. Finished goods

Question 6

Cost of Goods Sold (COGS) definition

Answer 6

COGS is an expense reported on income statement; directly related to sales revenue. We need COGS due to matching principle to match the direct cost of the inventory to the period of the sale; it’s the portion of goods available for sale that is sold

Question 7

What are the TWO JE for COGS when we make a sale?

Answer 7

JE #1
Dr. A/R or Cash (+A)
Cr. Sales Revenue
JE#2
Dr. COGS
Cr. Inventory

Question 8

How to find COGS?

Answer 8

of units sold * unit costs

Question 9

How to find sales revenue?

Answer 9

of units sold * sales price

Question 10

COGS equation

Answer 10

Beginning Inventory
+ Purchases of merchandise
=Cost of Goods available for sale (COGAS)
-Ending Inventory
=Cost of Goods Sold (COGS)

BI + P - EI =COGS

Question 11

FIFO (First-in, First-out) Definition

Answer 11

FIFO assumes that the first goods purchased (the first in) are the first goods sold (the first out). FIFO allocates the oldest unit cost to cost of goods sold and the newest unit costs to ending inventory.

Question 12

Two JE are recorded for all Inventory Costing Methods- FIFO, LIFO, and Average Cost

Answer 12

JE #1
Dr. A/R or Cash (+A)
Cr. Sales Revenue (+R, +SE)

JE #2
Dr. COGS (+E, -SE)
Cr. Inventory (-A)

Question 13

Last-In, First-Out (LIFO) Definition

Answer 13

LIFO assumes that the last good purchased (the last are in) are the first goods sold (the first out). LIFO allocates the newest unit costs to costs of goods sold and the oldest unit costs to ending inventory

Question 14

Average Cost Method/Weighted Average Cost Method Definition

Answer 14

Average cost uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory

Question 15

Average Cost Method/Weighted Average Method Equation

Answer 15

Average Cost = COGAS / # of units available for sale

Question 16

If costs are rising what happens to FIFO and LIFO?

Answer 16

1. FIFO has higher ending inventory than LIFO
2. FIFO has lower COGS (therefore) higher Net Income than LIFO
3. FIFO has higher taxable net income than LIFO

Question 17

If costs are decreasing…what happens to LIFO and FIFO?

Answer 17

1. LIFO has higher ending inventory than FIFO
2. LIFO has lower COGS (therefore higher net income) than FIFO
3. LIFO has higher taxable net income than FIFO

Question 18

Consistency Definition

Answer 18

companies must consistently use one cost flow method. They can change but they must do significant disclosures so comparison to prior years may be made.

Question 19

Historical Cost Principle Definition

Answer 19

inventories should be measured initially at their purchase cost

Question 20

Conservatism Definition

Answer 20

special care is required to avoid overstating assets and income and understanding expenses and liabilities

Question 21

Lower Cost Method Rule

Answer 21

1. Serves to recognize a loss when replacement cost or net realizable value drops below cost
2. When the inventory can be replaced with identical goods at a lower cost the lower replacement cost should be used as the inventory valuation
3. Replacement cost- the current purchase price for identical goods

Question 22

JE for LCM to reduce the value of inventory

Answer 22

Dr. COGS (+E, -SE)
Cr. Inventory (-A)