Chapter 6 Flashcards

1
Q

Three categories of inventory

A

Finished goods inventory

Work in process

Raw materials

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2
Q

Finished goods inventory

A

Manufactured items that are completed and ready for sale

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3
Q

Work in process

A

The portion of manufactured inventory that has begun the production process but is not yet complete

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4
Q

Raw materials

A

The baic goods that will be used in production but have not yet been placed into production

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5
Q

Hepful hint: inventory classification

A

Regardless of the classification, companies report all inventories under Current Assets on the balance sheet

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6
Q

Just-in-time (JIT) inventory

A

Companies manufacture or purchase goods just in time for use

ex. Dell

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7
Q

Ethics note: salad oil company

A

Filled storage tanks with water so auditors thought they were full of oil

repainted numbers too

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8
Q

Ownership during FOB shipping point

A

ownership passes to the buyer when the public carrier accepts the goods from the seller

  • buyer pays freight costs
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9
Q

Ownership during FOB destination

A

Ownership remains with the seller until thegoods reach the buyer

seller pays freight costs

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10
Q

Consigned goods

A

Goods held for sale by one party although ownership of the goods is retained by another party

ex. a company is selling my car for a fee

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11
Q

Ethic Note: disadvantage of specific identification

A

Management can manipulate net income

Boost net income by selling units bought at low cost

or reduce by selling units bought at high cost

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12
Q

Specific identification

A

An actual physical flow costing method in which items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory

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13
Q

First in, First out (FIFO) method

A

An inventory costing method that assumes that the earliest goods purchased are the first to be sold

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14
Q

Helpful hint: FIFO

A

Another way of thinking about FIFO ending inventory is the LISH assumption

“Last is still here”

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15
Q

LIFO

A

An inventory costin gmethod that assumes the latest units purchased are the first to be sold

alternative: FISH “First is still here”

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16
Q

Average-cost method

A

An inventory costing method that uses weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold

COGS/Total Units Avilable for Sale = Weight Average Unit Cost

17
Q

Companies can use _________________ under GAAP

A

all three assumed cost flow methods

18
Q

REasons for different inventory cost flow methods

A
  1. Income statement effects
  2. Balance sheet effects
  3. Tax effects
19
Q

When prices are rising, companies prefer ______________

A

FIFO because it results in higher net income

20
Q

Helpful hint: LIFO and taxes

A

LIFO conformity

If companies use LIFO for taxe purposesm they must also use it for financial purposes

21
Q

LIFO _____________ the quality of earnings ratio

A

increases

higher net cash from operating activities

lower net income

22
Q

Lower-of-cost-or-market

A

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost

23
Q

Current replacement cost

A

The cost of purchasing the same goods at the present time form the usual suppliers in the usual quantities

24
Q

Concept of conservitism

A

The best choice among accounting alternatives is the method that is least likely to overstate assets and net income

25
International Note: write-downs
Under GAAP - companies cannot reverse inventory write-downs if inventory increases in value in subsequent periods IFRS - permits companies to reverse write-downs in some circumstances
26
Inventory turnover ratio
_Cost of Goods Sold_ Average Inventory \*Indicates how quickly a company sells its goods
27
Days in inventory
_365_ Inventory Turnover Ratio \*indicates the average number of days inventory is held
28
LIFO reserve
For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO
29
Moving average method
Company computes a new average after each purchase for unit costs
30
Beginning inventory understated
Cost of goods sold: understated Net income: overstated
31
Beginning inventory overstated
Cost of Goods Sold: Overstated Net income: Understated
32
Ending inventory understated
Cost of Goods Sold: Overstated Net income: Understated
33
Ending inventory overstated
Cost of Goods Sold: Understated Net income: Overstated
34
Ending inventory error: Overstated
Assets: Overstated Liabilities: No effect Stockholder's equity: overstated
35
Ending inventory error: Understated
Assets: Understated Liabilities: No effect Stockholders' Equity: Understated
36