Chapter 6 Flashcards
an owner of inventory goods who ships them to another party who will then find a buyer and sell the goods for the owner the consignor retains title to the goods while they are held offsite by the considnee
consignor
consignee
one who receives and holds goods owned by another party for the purpose of acting as an agent and selling the goods for the owner the consignee gets paid a fee from consignor for finding a buyer
What is NRV
Net realizable value
what is the definition of NRV
the expected sales price of an item minus the cost of making the sale
the selling price of merchandise inventory
retail price
cost of inventory cacluations
purchase price minus discounts provided by supplier ( trade discounts/rebates) + additional costs necessary to put inventory in a place and condition for sale = cost of inventory
examples of additional incidental costs that are to be added to inventory
- import duties
- transportation-in (freight costs)
- storage
-insurance
-handling costs - costs incurred in an aging process where the aging contributes to the value of the product produced ( for example aging of wine and cheese)
what does accounting principles imply
the incidental costs are assigned to every unit purchased - this is so that all inventory costs are properly matched against revenue in the period when inventory is sold
materiality principle
states that an amount may be ignored if its effect on the financial statements is not important to their users. Financial statement preparers need to assess whether the item would impact the decision of a user
what does materiality principle rely on
relied on by some companies as the reason some incidental costs are not allocated to inventory
physical inventory count
to count merchandise inventory for the purpose of reconciling goods actually on hand to the inventory control account in the general ledger; also called taking an inventory
internal controls
the policies and procedures used to protect assets, ensure reliable accounting, promotes efficient operations, and urge adherence to company policies
COGS caculations
beginning inventory + purchases minus ending inventory = COGS
what is FIFO
First-in, first-out
what are the three key methods that are used in assigning costs to inventory and cost of goods sold under perpetual inventory system
- First-in, first-out FIFO
-moving weighted average - specific identification
what does FIFO mean
the pricing of an inventory under the assumption that inventory items are sold in the order acquired; the first items received are the first items sold
what is moving weighted average
a perpetual inventory pricing system in whick the unit cost in inventory is recalculated at the time of each purchase by dividing the total cost of goods available for sale at that point in tie by the corresponding total units available for sale the most current moving weighted average cost per unit is multiplied by the units sold to determine cost of goods sold
specific identification
the pricing of an inventory where the purchase invoice of each item in the ending inventory is identified and used to determine the cost assigned to the inventory
the consistency principle
the accounting requirement that a company use the same accounting policies period after period so that the financial statements of succeeding periods will be comparable
do companies have to use one method
no the consistency principle does not require a company to use one method exclusively
principle of faithful representation
the accounting principle that requires information to be complete, neutral, unbiased, and free from error
what is LCNRV
lower of cost and net realizable value
what does LCNRV mean
the required method of reporting merchandise inventory in the balance sheet where net realizable value is reported when net realizable value is lower than the cost. This rile ensures inventory is not recorded at a higher value on the balance sheet than what the company cal sell the item for
how is LCNRV applied
- usually item by item, or , when not practicable
- to groups of similar or related items
what is the accounting equation
assets= liabilities + equity
what cause an understate ending inventory
understated assets and understated equity
what causes overstated ending inventory
overstated assets and overstated equity
what is gross profit method
an estimate used for determining ending inventory in the event inventory is destroyed. The companies determining gross profit rate is used to estimate COGS which is them subtracted from the cost of goods available for sale to determine the estimated ending inventory
gross profit ratio
measures how much of net sales is gross profit ( net sales minus COGS) calculated as gross profit divided by net sales; also know as the gross margin ratio
what is the quick method to estimate ending inventory using the gross profit method
step 1. calculate Cost of goods available for sale = inventory + purchases example: 12,000+20,500=32,500
Step 2. deduct COGS = net sales x COGS% = difference = estimated ending inventory
example: 30,000*(1-0.30)=21,000 - 21,000 = 11,500
retail inventory method
a method used by retailers to estimate an ending inventory cost based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at marked selling prices
Inventory turnover
a financial statement analysis tool used to determine the number of times a company’s average inventory was sold during an accounting period, calculated by dividing COGS by the average merchandise inventory balance;
Day’s sales in inventory
a financial analysis tool used to estimate how many days it will take to convert the inventory on hand into accounts receivable or cash; calculated by dividing the ending inventory by cost of goods sold and multiplying the result by 365
