Chapter #5 Flashcards
what is an operating cycle
a series of activites that describe how a company takes casha nd turns it into more cash
what kind of items are considered as inventory
only items that a firm sells
what financial statement does the value of inventoy affect
balance sheet
income statement
when is the purchase of inventory recorded
not when ordered but when inventory received
two ways to record inventory transactions
perpetual inventory system
periodic inventory system
perpetual inventory system
firm updates inventory accounting records every time when inventory is purchased, sold, and returned
periodic inventory system
updating inventory account only at the end of a period
missing inventory is considered as sold - cost will be included as costs of goods sold expense
what does the cost of inventory include
all costs to obtain merch and get it ready for sell
e.g. shipping costs
different shipping terms between buyer and vendor
FOB shipping point
FOB destination
FOB shipping point
buying firm pays shipping costs
amount is called freight-in -> included in inventory
buyer responsible for inventory from vendor´s warehouse on
FOB destination
vendor pays shipping costs
buyer has no freight-in costs
vendor responsible for inventory until it reaches buyer
what is a transaction called when firm returns goods to a vendor
purchase return
in accounting system where will purchase return be noted
deducted from cost of inventory
reduction in accounts payable
purchase allowance
when goods are damaged but kept within a firm, but reduction of purchase price
purchase discount
reduction in price of inventory purchase for prompt payment
example of purchase discount
2/10, n/30 ->2% discount if buyer pays within 10 days entire purchase price, if not full amount is within 30 days
how is transaction recorded when purchse discounts were used
full amount as reduction in accounts payable
decrease in cash
decrease in inventory of amount saved
cost of goods available for sale
total of beginning inventory + net purchases made during period
sales and returns allowance
account with amounts that reduce sales due to customer resturns or allowances for damaged merch
deducted from sales revenue for income statement
what is sales and return allowance an example for
contra-revenue
what is a return of a good from a customer recorded as
decrease in accounts receivable
decrease in sakes return and allowances (S/E)
sales discount
reduction in the sales price offered to customer for prompt payment
where is sales discount recorded in an income statement
deducted from revenue sales
what does a company need to collect in additon to sales revenue
sales tax
advantage of a perpetual inventory system
inventory shrinkage can be recorded - stolen, damaged or lost inventory
what is an inventory cost flow assumption used for
to calculate cost of good sold for income statement and cost of ending inventory for balance sheet
determine how $ of cost of goods available for sale is devided into cost of goods sold and ending inventory
what are the different inventory cost flow assumptions
specific identification
weighted average cost
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
specific identification method
inventory cost flow method
keeps track of actual cost of specific goods sold because firm records cost of goods sold
weighted average coast method
inventory cost flow method
average cost of goods available for sale is used to calculate cost of goods sold and ending inventory
calculation of average unit cost -> applied to all units sold = cost of goods sold, average number -> applied to all units remaining = value of ending inventory
First-in, First-out (FIFO)
inventory cost flow method
first items purchased are the first ones sold
Last-in, first-out (LIFO)
inventory cost flow method
last items purchased are the first ones sold
what is important to understand regardless of the inventory cost flow method
no matter which method, cost of goods available for sale is the same
when does FIFO result in a higher net income
only in period of increasing inventory cost
in what kind of financial statement are income taxes included
statement of cash flow
disadvantage of using LIFO
lowest net income
which income statement has the highest deduction by income taxes
the one formed with FIFO
how do firms use an inventory cost flow method
compatibility with similar companies
maximize tax savings and cash flow
maximize net income
which inventory cost flow method produces the largest net cash flow from operating activities
LIFO
lower-of-cost-of-market rule (LCM)
use of lower either cost or market value of inventory for a financial statement
gross profit/margin ratio
sales - cost of goods sold (gross profi)/sales
measures firm´s performance
portion of sales dollar a company has left after paying for cost of goods sold
inventory turnover ratio
cost of goods sold/(beginning inventory - ending inventory) /2
measures how many times a firm turns over its inventory during a year
