chapter 6 Flashcards
what are the 3 cost determination formulas?
specific ID
FIFO
average cost
what are the 3 things that choosing a different cost determination formula impact?
inventory errors
presentation and analysis of inventory
inventory cost formulas in a periodic period
what are the 2 components of determining inventory quantity?
determining ownership of goods
taking a physical inventory, making count adjustments, internal controls
does inventory have to be counted at the end of each accounting period, whether it is a periodic or perpetual system?
it does not matter what system you use you always have to do an inventory count
what are the 2 reasons you count the inventory at the end of the accounting period?
to check the accuracy of the perpetual inventory records
to determine the amount of inventory lost to shrinkage
does physical location of goods determine ownership of goods?
no, who ever pays shipping on the goods have ownership during transit
does ownership of goods have to be taken in to account when taking inventory?
yes
does goods in transit at the end of the period make the determination of ownership of goods more complicated?
yes
how can goods in transit make ownership of goods more complicated?
hard to determine who has legal title to goods in transit
when would you include goods in transit in the inventory count?
if the company has legal title when the goods are in transit, this depends on who paid doe shipping, FOB shipping point or FOB destination
what do companies do to ensure that inventory is properly counted?
companies must have a good system of internal control
what are 2 internal control systems?
control activities
review and reconciliation
what are control activities?
counting inventory
what are review and reconciliation activities?
adding the count of inventory in companies inventory systems
once inventory quantities are counted, what must be applied?
must apply unit costs to determine total cost of inventory
can inventory be purchased at different prices?
yes, journal entries used to record purchases of inventory only show the total cost, not the per unit cost
what is the specific identification cost formula?
they track physical flow of goods and each unit is tagged with its specific cost
when can the specific identification cost formula be used?
only in perpetual system
when the actual cost of each item can be determined
goods are easily distinguishable
goods can be produced and segregated for specific projects
what is an example of an item that is good for specific identification cost formula?
cars
what do cost formulas assume?
a flow of costs that may not be the same of the actual flow of goods
what is the FIFO (first in first out) cost formula?
it assumes that the earliest goods purchased are the first to he sold, cost of first item purchased is cost of first item sold
how is ending inventory determined in FIFO (first in first out)?
cost of ending inventory will be determined using the costs of the most recently purchased items
what is average cost, cost formula?
cost is determined using a moving weights average of the unit costs of the items purchased
when is average cost inventory used?
when physical flow of inventory cannot be specifically measured
what is important when choosing an inventory cost formula?
chose a formula that best represents as closely as possible the physical flow of goods, reports ending inventory at recent costs and use the same formula for inventories of similar nature and usage
what are the 3 advantages of specific identification cost formula?
results in the actual cost of goods sold when reported with related revenues on the statement of income
tracks the actual physical flow of goods
ending inventory is reported at actual cost
what are the 2 advantages of FIFO cost formula?
ending inventory on the statement of financial position is based on the most current costs, closest to the replacement cost, come users may find these costs more relevant
approximates the physical flow of goods for most retailers
what are the 3 advantages to the average cost formula?
cost of goods sold on the statement of income included more currents costs than FIFO, providing a better match to sales, som users may fid that provides a more relevant measure of gross profit
can approximate the physical flow of goods for some companies
smooths the effects of price changes by assigning all units the same average cost
what are the two most common errors when accounting for inventory?
counting and determining the cost of ending inventory incorrectly
recording the purchase of inventory in the wrong time period
what do inventory errors impact?
both the statement of financial position- through merchandise inventory, and the statement of income- through cost of goods sold
when the net realizable (fair) value is less than cost, what is needed to be done?
the value is written down
what is the lower of cost and net realizable value rule?
when the net realizable value is less then the cost of the goods
what is net realizable value?
when the selling price is less than any costs to make the goods ready for sale
what is an example of the lower the cost and net realizable value rule?
if you are apple and you have iPhone 10,s and the 16 is the newest, the value of the the 10s is less than the recorded value and it might be marked down to reflect for value
when you are realizing the fair value of goods, what to the entries look like?
cr inventory
dn cost of goods sold
how do you apply the lower of cost and net realizable value rule?
apply It to an individual inventory item, reduce inventory by crediting it for the amount of write-down, debit cost of goods sold account
if the realizable value recovers, can you adjust the value of inventory?
yes by reversing the original entries
when you the realizable value of inventory recovers, what is the rule when you are adding value back?
you have to adjust it to its original value, you cannot increase It past its original value
is there any differences when reporting inventory between IFRS and ASPE?
no
when reporting inventory on the statement of financial position, how do you report it?
at the lower cost and net realizable value
regarding inventory, what is in the notes to the statement?
the total amount of inventory
cost of goods sold
cost formula used
amount of write-downs to net realizable value/ reversals
amount of any inventory pledged to security
what does it mean when inventory is pledged to security?
when the inventory or asset is used as collateral for a liability
what kind asset is used as security for a current liability?
current assets (inventory or accounts receivable)
what kind of assert is used for security for a non current liability?
non current assets (land, buildings, equipment)
what is inventory turnover?
how long it takes to sell inventory and how much they should have
what are the 2 ratios that help manage inventory turnover?
inventory turnover ratio
days in inventory ratio
what does the inventory turnover ratio measure?
measures the number of times on average, inventory is sold in a period
what does the days in inventory ratio measure?
converts the inventory turnover ratio into number of days inventory is held
what is good for the inventory turnover ratio?
typically higher is better
what is good for days in inventory ratio?
lower is better
what is the formula for the inventory turnover ratio?
cost of goods sold/ average inventory
what is the formula for the days in inventory ratio?
365 days/ inventory turnover
do fifo and average cost formula be used for periodic?
yes
what is the inventory formula gives the most accurate representation of the cost of the inventory?
fifo
