Chapter 5 (Inventory & COGS) Flashcards
Operating Cycle (Merchandising Firm)
1) purchase finished goods for ______ (+ Inventory)
2) Sell merchandise and deliver to customers
3) Receive ____ from customer
Expenditures Included in Inventory
- Invoice _____, and freight on purchases would _________ recorded inventory; Purchase returns and allowances, and purchase discounts would _________ recorded inventory
1) resale
3) cash
price, increase, decrease
Perpetual vs. Periodic Inventory
- Perpetual = purchase transactions are recorded ________ in an inventory account (sale requires two entries to record: 1) the retail sale and 2) the ____
- Periodic = No up-to-date record of inventory is maintained during the year
Calculating COGS
- Equation: _________ inventory + Purchases for the period = goods ___________ for sale - ______ inventory = COGS
directly, COGS
Beginning, available, ending
Inventory Cost Flow Assumptions (cost flow does not necessarily have to correspond to physical flow)
- Specific Identification: when units are sold, the specific ____ of the unit sold is added to COGS
- Impractical for businesses with large quantities of similar items stocked
- ____: Oldest costs - COGS; recent costs - ending inventory
- ____: Oldest costs - ending inventory; recent costs - COGS
- Weight Average Cost: Each unit in COGS and each unit in ending inventory has the same average cost
- Formula: Cost of Goods _________ for sale/ # of _____ available for sale
cost
FIFO, LIFO
available, units
- Most companies track at least inventory on a _________ basis
- Specific Identification or ____ inventory values are the same regardless of whether computed on a perpetual or periodic basis
- In periods of rising prices, _________ (periodic/perpetual?) LIFO yields lower taxes than __________ (periodic/perpetual?) LIFO.
- Companies that report ____ record an adjusting journal entry to convert to ____ at period-end
perpetual
FIFO
periodic, perpetual
LIFO (x2)
Inventory Costing Method Choice
- Advantages: FIFO - In periods of rising prices, results in ______ in net income. LIFO - In periods of rising prices, results in _____ taxes.
- LIFO __________ rule: If using LIFO for tax purposes, must also use for financial reporting.
- Ending inventory is reported at the lower of cost or net realizable value.
- Net Realizable Value = ________ price - ____ to sell
- ____________ causes the recognition of ‘holding loss’ when inventory value drops prior to sale (** If we think we’ll take a loss, report it now**)
higher, lower
conformity
selling price - cost to sell
conservatism
Inventory Errors
- Overstatement of ending inventory leads to an ______________ of COGS and _____________ pretax income.
- Understatement of ending inventory leads to an _____________ of COGS and an ______________ of pretax income.
Inventory Management
- Inventory turnover ratio = (____/ Average Inventory)
- Average Inventory = ((Beg. Inv + End Inv)/2)
- The _______ the inventory turnover ratio, the better.
- Days’ sales in inventory = (365/ _________ ________)
- The _____ days’ sales in inventory, the better.
understatement, overstatement
overstatement, understatement
COGS
higher
(365/inventory turnover)
lower
LIFO Reserve
- Formula: Ending Inventory (____) - Ending Inventory (____)
- FIFO COGS = ____ COGS - change in ____ _______
Ending inventory (FIFO) - Ending inventory (LIFO)
FIFO COGS = LIFO COGS - change in LIFO Reserve
- Adjustment entry needed if ___ at year-end is expected to be ____ than the unit cost when acquired. It will be adjusted by the difference between the value of each.
- To reflect the reduction in inventory value (‘holding loss’), ____ is debited, and _________ is credited.
NRV, less
COGS, inventory
Exam 2 Notes
- credit discount only applies to merchandise cost, not to shipping costs (i.e. shipping cost is capitalized into inventory afterward to find the final inventory value)
