Chapter 6 powerpoint Flashcards

1
Q

Merchandiser inventory classication

A

merchandise inventory

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2
Q

Three manufacturer inventory classifications

A

Finished goods inventory

work in process

raw materials

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3
Q

finished goods inventory

A

maunfactured items that are completed and ready for sale

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4
Q

work in process

A

manufactured inventory items that are completed and ready for sale

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5
Q

Raw materials

A

The basic goods that will be used in production, but have not been placed into production

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6
Q

Just in time inventory (JIT)

A

Companies manufacture or purchase goods just in time for use

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7
Q

Two reasons to count physical inventory in a periodic system

A

To determine the inventory on hand at the balance sheet date

To determine the cost of goods sold for the period

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8
Q

Two steps in taking a physical inventory count

A
  1. Taking a physical inventory of goods on hand
  2. determining the ownership of goods
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9
Q

FOB shipping point

A

buyer pays freight costs

ownership goes to buyer once given to mail carrier

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10
Q

FOB destination

A

Seller pays freight costs

ownership goes to buyer when mail carrier drops off goods to buyer

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11
Q

Consigned goods

A

Goods of other parties that agree to be sold with a fee, but without taking ownership of goods

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12
Q

Inventory

A

assets that will be resold

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13
Q

Cost of inventory

A

all the costs incurred to build the inventory

eg. factory, machinery, labor

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14
Q

Inventory and COGS

A

all costs necessary to acquire the inventory

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15
Q

Costs related to the sale

A

Not required for inventory acquisition should be classified as selling expenses and NOT in inventory

ex. freight-out

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16
Q

Lower of Cost or Market

A

US GAAP requires that all inventory be measured at lower of cost or market (replacement cost)

DOES NOT ALLOW upward revaluation of inventory

*consistent with conservatism

17
Q

Specific Identification

A

When a company can positively identify which particular units it sold and which are still in ending inventory

Keep records of original costs

Sells a limited variety of high-cost items

18
Q

In periods of increasing prices, what records highest net income?

A

FIFO

19
Q

In periods of decreasing prices, what reports the highest net income?

A

LIFO

20
Q

In periods of increasing prices, costs allocated to ending inventory using FIFO will __________________

A

approximate current costs

21
Q

In periods of increasing prices, costs allocated to ending inventory using LIFO will ___________________

A

be significantly understated

22
Q

LIFO reserve helps what?

A

to enhance comparability across companies, as users of financial statements can see difference in two inventory methods

23
Q

lower taxes?

A

LIFO during increasing prices

24
Q

Inventory Turnover Ratio

A

Cost of Goods Sold / Average Inventory

An indication of how quickly a company sells its good

higher = better

25
Q

Days in inventory

A

365 days / Inventory Turnover Ratio

Measures average number of days inventory is held

Lower is better

26
Q

Average inventory formula

A

(Beginning inv. + Ending inv.) / 2

27
Q

Understate Beginning inventory:

A

COGS = understated

Net income = overstated

28
Q

Overstate beginning inventory

A

COGS = Overstated

Net income = understated

29
Q

Understate ending inventory

A

COGS = overstated

Net income = understated

30
Q

Overstate ending inventory

A

COGS = understated

Net income = overstated

31
Q

Ending inventory overstated (balance sheet)

A

Assets = overstated

Liabilities = no effect

SE = Overstated

32
Q

Ending inventory understated (Balance Sheet)

A

Assets = understated

Liabilities = No effect

SE = understated