Chapter 6 Flashcards
In the perpetual system, why is inventory taken?
1) Check accuracy of inventory records
2) Determine amount of inventory lost
In the periodic system, why is inventory taken?
1) Determine the inventory on hand
2) Determine the cost of goods sold for the period
What are the two steps to determining inventory quantities?
1) Take a physical inventory
2) Determine ownership of goods
When is ownership of goods transferred?
It passes from the seller to buyer when the public carrier accepts the goods from the seller; therefore goods should be counted in inventory of the buyer
When is ownership transferred in FOB shipping point?
When the product leaves the seller and is in the hands of a public carrier
When is ownership transferred in FOB destination?
When the product is delivered to the buyer. When the buyer actually takes possession
What does the specific identification method do?
This tracks the actual physical flow of the goods. Each item of inventory is coded with its specific cost.
What are the assumed cost flow methods?
1) First-in, first-out (FIFO)
2) Last-in, first-out (LIFO)
3) Average Cost
What does the FIFO method do?
Assumes that the earliest goods purchased are the first to be sold. The costs of the earliest goods purchased are the first to be recognized as cost of goods sold
How can the accuracy of COGS be verified?
By recognizing that the first units acquired are the first units sold
What does the LIFO method do?
Assumes that the latest goods purchased are the first sold. The costs of the latest goods purchased are the first to be cost of goods sold
What does the average cost method do?
Assumes the goods available for sale are homogenous. The cost of goods available for sale is allocated on the basis of the weighted average unit cost incurred
In periods of increasing prices, which method produces the most income?
FIFO, LIFO is lowest
In periods of decreasing prices, which method produces the least income?
FIFO, LIFO is highest
In periods of rising prices, which method is least taxable?
LIFO
When is inventory written down to market value?
When the value of the inventory is less than its cost
How do you compute inventory turnover ratio?
COGS/Avg inventory
What does the inventory turnover ratio tell?
The ratio tells how many times the inventory turns over (is sold) during the year
How do you calculate days in inventory?
365 days/inventory turnover ratio
What is the LIFO reserve?
This is a requirement by GAAP for firms using LIFO to report the amount that inventory would increase if the FIFO method had been used instead.
How do you calculate ending inventory under FIFO?
Ending inv under LIFO + LIFO reserve
