Chapter 6 Flashcards
FOB destination
inventory belongs to the buyer when it reaches the destination (seller pays freight)
FOB shipping point
inventory belongs to buyer when it leaves place of business (buyer pays freight)
Perpetual inventory
inventory is recorded as it comes in and out
periodic inventory
inventory is recorded at end of period
Specific Identification
tracks physical flow of goods (perpetual only)
When can specific Identification be used?
actual cost of each item can be determined, goods are distinguishable, or goods segregated for specific purpose (ex a project)
FIFO (first in first out)
COGS recorded as oldest inventory cost on income statement
Average cost
cost determined by weighted average of the items purchased
when to use FIFO?
to find value of inventory
When to use average cost?
when physical inventory flow cannot be measured,
When capturing cost
How do FIFO, Ave. Cost, and Specific Identification affect cash flow?
It does not
all three formulas give same result over time, but
COGS and ending inventory may vary
COGS
rising prices
FIFO-lower
AC-higher
(reverse if decreasing prices)
Gross profit, net income, ending inventory, retained earnings
(rising prices)
FIFO-higher
AC-lower
(reverse if decreasing prices)
Overstated inventory:
Income statement
COGS: under,
Gross P: Over,
Income b4 tax: over,
RE: over
