Chapter 6 Flashcards
The company purchased the inventory at $200 on
July 1, 2019. The market value of the inventory is
assessed to be $400 on the fiscal-year end date on
December 31, 2019. What should be the amount of
the inventory reported on the balance sheet as at
December 31, 2019?
We choose market value price which is 200
What is net realizable value?
Expected selling price - sum of selling costs and costs to complete. It is the estimated retail market value of inventory
What events change value of inventory?
- Lower sale price
- additional costs to sell
What is a fire sale?
Selling goods or assets at heavily discounted prices. (Normally when seller is in financial distress)
What is lower of cost of NRV?
Concept that inventory should be reported at the lower of its costs or the amount at which it can be sold (market value)
Direct write down method of inventory?
(Dr) COGS (Cr) Inventory
Indirect write down method of inventory?
(Dr) Loss due to market decline
(Cr) Inventory
Equation for inventory?
Ending inventory = beginning inventory + purchase - COGS
The requirement to use lower cost or market (LCM) rule is a result of the application of which account principle?
Conservatism principle
Equation for cost of goods available
Beginning inventory + purchase
How to compute estimated value of inventory stolen with periodic inventory system?
Find ending inventory and this is your answer
Equation for inventory turnover?
COGS/average inventory
number of times inventory is renewed each year
Equation for inventory turnover in 365 days?
365/inventory turnover ratio
number of days it takes to renew inventory
Do you want a long or short days in inventory?
Shorter the better but must have inventory on the shelves to sell it
When do you not need an average value on B/S items for financial ratios?
If the denominator and numerator come from the same financial statement
What is FIFO?
Assumption that the first item purchased is the first item sold during the year
What is the average cost method?
Take the average value to determine inventory cost during the year
Journal entry when specific item is sold?
(Dr) Cash, COGS - itemA
(Cr) Sales revenue, Inventory - item A
What is the specific identification method?
If invenotry items are unique then company will likely track cost of each item in inventory as cost for each item is different
Can a company use multiple cost flow assumptions for different product groups of the firm?
Yes
At the beginning of 2022, Movie Studio plans to make
three movies in 2022. The total costs for the three movies are expected to be $555 million. So the average cost per movie is estimated to be $185 million. As a CEO, would you sell one movie for $190 million?
No. Because each film is unique, we need to keep track of the costs separately for decision-making. We should not use the average value of the total costs when the product is unique
Assumption in FIFO?
Firs unit sold is the first unit that was purchased
In FIFO what is the COGS?
Cost of the units purchased first
In FIFO what is the year-end inventory?
Cost of the units purchased last
If costs are increasing over time, FIFO gives higher or lower net income under the assumption that all else is equal (including total purchase price of the inventory during the year), compared to the case when costs are decreasing?
In order to have higher net income we need a smaller COGS expense. Inflation case will give us smaller COGS expense relative to deflation case. So smaller COGS expense gives higher net income so the answer is higher.
If costs are rising, FIFO gives?
Lower COGS
Higher gross margin
Higher net income
Higher ending inventory
How to calculate average cost method under perpetual system?
When a sale occurs, the average unit cost at that point us used in order to calculate COGS
average cost per unit = units of inventory remaining * cost / units of inventory
COGS = units sold * average cost per unit
Assume that a company adopts the perpetual inventory system. If costs are rising, average cost method gives higher or lower net income, compared to FIFO?
Lower. In FIFO the oldest purchase are the ones we’ve sold so they must be cheaper because of inflation. When inventory is sold they are cheaper than purchased so COGS wil be smaller so FIFO has a higher net income
Most recent purchases will be more expensive in case of inflation so for FIFO ending inventory balance will be higher. What is true about the current ratio of the corporations?
Most recent purchases will be more expensive in case of inflation so for FIFO ending inventory balance will be higher. So current ratio of A is larger than current ratio of B
Is cash higher in FIFO or average cost?
They are the same
Is Ending inventory higher in FIFO or average cost?
FIFO
Is retained earnings higher in FIFO or average cost?
FIFO
How to calculate average cost under periodic system?
Ending inventory is remaining units of inventory * (weighted average unit cost)
Cost of goods available for sale = beginning inventory + purchased
COGS = beginning inventory + purchased - ending inventory
Weighted average unit cost = COG available for sale / total units availabble for sale)
If all else is equal, which inventory system gives higher net income
under the assumption that the costs are rising over time?
Perpetual
With perpetual we look at moving average and periodic we look at weighted average. If we assume inflation then perpetual. (Would be opposite if assuming deflation)
