Ch. 9 Inventory Add Issues Flashcards
information is complete, neutral, and free from error, accurately reflecting the economic events or transactions it is intended to depict
faithful representation
provide all necessary information
completeness
good process to determine the accounting numbers/accounts
free from error
not too positive, not too negative, just tell it as it is
neutrality
ceiling =
net realizable value
(market cant be more than that bc its the ceiling)
floor =
- normal profit margin
(market cannot be less than this bc its the floor)
net realizable value equation
net realizable value =
estimated selling price - cost to complete and sell
If replacement cost is between celing and floor what number gets put up for market
replacement cost
If replacement cost is above the ceiling what number gets put up for market
ceiling number
If replacement cost is lower than the floor what number gets put up for market
floor number
we measure inventory based on
what we paid to acquire it
if the inventory we acquired has dropped in value what do we do
we recognize the expense (or loss) immediately
what do we do if inventory has increased in value
do nothing
Gross profit equation
Gross profit =
revenue - COGS
Gross margin equation
Gross margin =
Gross profit / total seling value
- not GAAP
- imprecise
- relies on past results
- easy way to estimate the value of ending inventory
gross profit method
Gross profit as a percentage of sales equation
gross profit as a percentage of sales =
gross profit as a percentage of cost / (1 + gross profit as a percentage of cost)
3 steps of the gross profit method
- determine gross profit as a percentage of sales
- estimate costs of goods sold
- estimate ending inventory
estimated COGS equation
estimated COGS =
sales * (1 - gross profit as a percentage of sales)
how to find estimate ending inventory
beginning inventory XX
+ net purchases XX
= COGAFS XX
- ending inventory ?
= COGS XX
agreement to purchase quantity of materials during a future period at an agreed upon cost
purchase commitments
why would a buy enter into a purchase commitment
lock it in at a certain price
-chipotle-inputc: rice, beans, beef, lettuce, sells to customers:fixed in the short run
why would a seller enter into a purchase commitment
agree to a purchase agreement
- lock in their demand/know how much to produce
financial statements you write “we entered into a purchase agreement to buy all beef for $3/lb for the next 6 months
disclose if noncancelable and material
record a loss if contract price is < or > market (LIFO)
contract > market (LIFO)
record a loss if contract price < or > NRV (other methods)
contract > NRV (other methods)
if you discover an inventory error in the same period as it occurred what do you do
fix it
if you discover an inventory error in the future what do you do
need to correct the error in the current period
go back and re-do previous year accounting
retrospective restatement
for companies that use a cost method other than LIFO or the retail inventory method, we report inventory at the lower of
cost or NRV
for companies that use LIFO or the retail inventory method, we report invnetory at the lower of
cost or market
effects of an inventory write down are to reduce _____ and ________
reduce reported inventory
and
reduce net income
the estimated selling price of the inventory in the ordinary course of business reduced by reasonably predictable costs of completion, disposal, and transportation
NRV
the inventorys current replacement cost (by purchase or reproduction)
market
using ____ in periods of rising costs is that it produces higher COGS and lowers net income and income taxes
LIFO
a company changing to ___ usually does not report the change for past inventory
LIFO
if an inventory error is discovered 2 years later what do you do
nothing the error has self corrected
Floor equation
Floor =
NRV - normal profit margin
