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Intermediate accounting 1 > CH 8 > Flashcards

CH 8 Flashcards

1
Q

Define Perpetual system

A

a. Continuously tracks changes in the inventory and COGS accounts

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2
Q

What are common features to perpetual system

A

a. Purchases of merchandise for resale or raw materials for production are debited to inventory rather than to purchases
b. Fright in is debited to inventory, not purchases. Purchase returns and allowances and purchases discounts are credited to inventory rather than to separate accounts
c. COGS is recorded at the time of each sale by debiting COGS and crediting inventory.
d. A subsidiary ledger of individual inventory records is maintained as a control measure. The subsidiary records show the quantity and cost of each type of inventory on hand

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3
Q

Define Periodic system

A

a. Determines the quantity of inventory on hand only periodically as the name implies
b. Purchases account is added at the end of the accounting period

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4
Q

How do you compute the cost of goods sold from periodic system

A

a. Ending inventory minus cost of good available for sale

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5
Q

How does perpetual system record purch units?

A

a. “Inventory”

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6
Q

How does periodic system record purch units?

A

a. “Purchases”

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7
Q

Which inventory system records its sold inventory?

A

a. Perpetual system

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8
Q

How does periodic system record its inventory at the end of the period?

A

a. (DR) Inventory ( ending)
b. (DR) COGS
c. (CR) Purchases
d. (CR) Inventory ( Beginning)

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9
Q

How does perpetual system record at the end of the period?

A

a. It doesn’t- “ no entry required”

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10
Q

What does inventory overages and shortages represent?

A

a. misstatement of cost of goods sold

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11
Q

Define inventory over and short

A

a. An adjustment between inventory of perpetual system and physical
b. Periodic system isn’t required to record this difference

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12
Q

Define COGS available for sale or use

A

a. Sum of COGS on hand at beginning of the period

b. The cost of goods acquired or produced during the period

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13
Q

How do you solve for COGS during the year

A

a. The cost of goods available for sale during the period

b. The cost of goods on hand at the end of the period

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14
Q

What are three valuing inventories

A

a. The physical goods to include in inventory
b. The costs of include in inventory
c. The cost flow assumption to adopt

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15
Q

Inventory is buyer’s when received expect

A

a. FOB shipping point ( buyers during delivery)
b. Consignment goods ( not seller’s nor buyer’s)
c. Sales with buybacks (seller’s, but buyer’s)
d. Sales with high rates of returns ( buyer’s if estimate returns)
e. Sales on installments ( buyer’s if buyer solves estimation of collectability)

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16
Q

Is shipping FOB shipping point, title passes to buyer receives from goods from common carrier?

A

a. False, FOB shipping point, passes ownership when goods are delivered
b. FOB destination is true to this statement, not FOB shipping point.

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17
Q

If working capital and current ratio is understated so is retained earnings

A

a. False, ending inventory is understated

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18
Q

If COGS is overstated, is NI understated?

A

a. Yes

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19
Q

Is there counter balance of two income statements if there is a error?

A

a. Yes, usually it will be correct over time as long as it is overstated and understated with exact amounts

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20
Q

If a mistake occurs with purchases and obtaining inventory, does RE, working capital, COGS, and NI effected?

A

a. No, there is no effect with these accounts

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21
Q

Define product costs

A

a. Cost that attach to inventory

22
Q

Define period costs

A

a. Cost that are indirectly related to the acquisition or production of goods

23
Q

What is FASB’s rule on capitalize interests

A

a. Capitalize interest cost related to assets constructed for internal use or assets produced as discrete projects for sale or lease.

24
Q

Define Purchase Discounts

A

a. A periodic inventory system indicates that the company is reporting its purchases and accounts payable at the gross amount

25
Q

Define gross method

A

a. It reports purchase discounts as a deduction from purchases on the income statement

26
Q

Define net of the cash discounts

A

a. Company reports failure to take a purchase discount within the discount period in a purchase discounts lost account
b. I.e., net method

27
Q

Define net method

A

It considers discounts lost as a financial expense and reports it in the “ other expenses and losses” section of income statement

28
Q

Why is net method a better opinion than gross method

A

a. It provides a correct reporting of the cost of the asset and related liability
b. It can measure management inefficiency by holding management responsible for discounts not taken

29
Q

Define cost flow assumptions

A

a. Companies use one of several systematic inventory

b. There is no requirement that the cost flow assumption adopted be consistent with the physical movement

30
Q

Define moving average method

A

a. Another perpetual method that computes a new average unit cost (moving average) from each time it make a purchase.
b. Used if company cannot measure physical flow-inventory
c. Items that are similar would be easily to price than different
d. To find new average cost: divide from the balance section: early balance / entry after

31
Q

Define LIFO reserve

A

The difference between the inventory amount reported using LIFO for tax or external reporting purposes and the inventory amount using FIFO or some other method for internal reporting purposes

32
Q

Why company who uses lifo method, but they use other cost assumptions for internal reporting

A

a. Companies often base their pricing decisions on other cost assumptions
b. Recordkeeping on some other basis is easier because the lifo assumption usually does not approximate the physical flow of the product
c. Profit sharing and other bonus arrangements often depend on a non lifo inventory assumption
d. The use of a pure LIFO system is troublesome for interim periods

33
Q

Define LIFO effect

A

The change in the allowance balance from one period to the next

34
Q

How do you record LIFO reserve

A

a. (DR) COGS

b. (CR) Allowance to reduce inventory to LIFO

35
Q

What measure is used to evaluate a company’s liquidity

A

a. Current ratio
i. Higher current ratio indicates company is better able to meet current liabilities
ii. Not helpful for companies who use LIFO

36
Q

Why is specific goods approach unrealistic?

A

a. Account cost of tracking each inventory item is expensive
b. Erosion of the LIFO inventory can easily occur, called LIFO liquidation
i. Distorts net income and leads to substantial tax payments

37
Q

Define layers

A

a. Increases of costs from period to period

b. This method liquidates most recent inventory

38
Q

What is the first layer called?

A

a. Base layer

39
Q

True or False: LIFO liquidations can occur frequently when using a specific-good LIFO approach

A

a. True

40
Q

Why does company combine goods into pools

A

a. To simplify accounting

41
Q

Define specific good pooled lifo approach

A

a. A method used to alleviate lifo liquidation problems and to simplify lifo accounting by grouping good into pools of similar item. Thus, instead of tracking specific inventory units, a company combines and accounts for together , a number of similar units or product which usually results in fewer lifo liquidations

42
Q

42) How does specific good pooled lifo approach eliminates disadvantages of the specific good accounting

A

a. Reduces liquidation problems

43
Q

Why does specific goods pooled lifo approach creates inventory issues

A

a. Changes the mix of their products, materials, and production methods
b. The approach resorts to erosion ( LIFO liquidation)

44
Q

Define Dollar value LIFO method

A

a. Determines and measure any increases and decreases in a pool in terms of total dollar value, not the physical quantity of the goods in the inventory pool

45
Q

What is the advantage of using specific good pooled approach

A

a. Broader range of goods in a dollar value lifo pool
b. Permits replacement of good with similar items and use
c. Help protect layers from erosion ( lifo liquidation)

46
Q

What are advantages of LIFO

A

a. Matching ( inv profits occur when its cost matched against sales are less then the inv replacement cost
b. Tax benefits
i. A company matches the items it most recently purchased against revenues
ii. Improves cash flows
c. Future earnings hedge
i. Lifo eliminates or substantially minimizes write-downs to market as a result of price decreases.

47
Q

What are disadvantages of lifo

A

a. Reduced earnings
b. Inventory understated
i. Normally outdated products are less valuation because older products remain on inventory
c. Physical flow
i. LIFO does not approximate the physical flow of the items except in specific situations
d. Involuntary liquidation/poor habits
i. A distortion in reported income for a given period may result, as well as detrimental income tax consequences
ii. Buying habits- company may purch more goods and match these goods against revenue to avoid charging the old costs of expense

48
Q

Why does a company need to choose among various inventory methods?

A

i. If selling prices and revenues have been increasing faster than cost, distorts income as a result
ii. Where lifo has been traditional, such as department stores and industries where a fairly constant “ base stock” is present ( such as refining, chemicals, and glass)

49
Q

LIFO would be most inappropriate choice among other methods because

A

a. Prices tend to lag behind costs
b. Situations where specific identification is traditional
i. Ie. Automobiles
ii. Jewelry
iii. Etc

50
Q

Why do the companies follow the LIFO conformity rule?

A

a. They can switch from any cost method to LIFO for taxation

Intermediate accounting 1 (10 decks)

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