Chapter 7 Flashcards
When does a company recognize inventory and A/P
at the time it controls the asset
What is FOB shipping point
control changes when product is shipped
What is FOB destination
Control changes when the delivery is received
What are consigned goods
- Goods out on consignment remain the property of the consignor
-consignee makes no entry to inventory accounts
What are the two costs included with inventory
Period and Product Costs
What are product costs
Costs directly related to the product, go into inventory account
What are period Costs
Costs that don’t go into the product but still related to inventory, go into the expenses account
What is freigh out recorded as
Selling expense (period cost)
What companies use specific identification for inventory cost
- Small number of relatively costly easy to distinguish items
What is specific identification
When you match actual cost with physical flow of goods
Why do companies use cost assumptions
because it is too difficult to rack the physical movement of goods
What is a disadvantage of specific identification
May allow a company to manipulate net income
Why would a company use FIFO
-assumes COGS are sold in order purchased
-Approximates physical flow of goods
-Ending inventory is close to current cost
What are downsides of FIFO
-Fails to match current costs against current revenues
-Higher-income so higher taxes
Why would a company use LIFO
-allows companies to have lower taxes because COGS is higher
What are disadvantages of LIFO
- no tie to physical flow, lower income, lower current assets,
What is the LIFO conformity rule
if you use LIFO for tax, you must use it for financial purposes
Why do companies use LIFO for tax and external financial reporting and FIFO for internal purposes
1.) Pricing decisions
2.) Record keeping is easier
3.) Profit sharing or bonus arrangements
4.) LIFO is troublesome for interim periods
What is the LIFO reserve
Allowance account that reduces inventory to LIFO Account
What is the journal entry for LIFO reserve
COGS
Allowance to Reduce
Inventory to LIFO
Why is the specific goods approach to costing LIFO inventories unrealistic
- Cost and tracking each inventory is expensive
-Erosion of the LIFO inventory can easily occur which can distort net income
What is LIFO liquidation
older and lower-cost inventory is liquidated (sold) resulting in high net income and high taxes
What is $ Value LIFO
Helps protect companies from LIFO liquidation
-increases and decreases in a pool are measured in terms of total dollar value, not physical quantity of goods
What are the advantages of $ Value LIFO
1.) Broader range of goods in the pool
2.) Permits replacement of similar goods
3.)Helps protect from LIFO liquidation
what is the rule for layers in $ Value LIFO
Layers form only when ending inventory @ base year exceeds the beginning inventory at base year
