Chapter 7 Flashcards
Used the least, small businesses with few items
Specific identification
What is FIFO?
First in first out; oldest ones out
What is LIFO?
Last in first out; newest ones out
Cost of goods available/total # of units available = ???
Weighted average
Why do firms like to use LIFO for taxes?
LIFO results in lower net income which means lower taxes
What is the LIFO conformity rule (law)?
If you use LIFO for taxes you must use LIFO for GAAP
What produces lower COGS?
FIFO
T/F: LIFO produces lower COGS?
FALSE
What cost flow assumption results in higher net income, ending inventory, and taxes?
FIFO
What cost flow assumption results with low net income, low ending inventory, and low taxes?
LIFO
Can companies file their taxes with LIFO and their financial statements (GAAP) with FIFO?
NO!
Who is “in charge” or ministers laws in tax land?
IRS
Who is in charge in IASB land?
IFRS
T/F: LIFO is banned under the IFRS
TRUE
Why is LIFO banned under IFRS?
rarely represents the actual physical flow of the goods
Why is LIFO not banned under GAAP?
The business community wants lower taxes
If something has a lower market value than originally stated, what is that called/what needs to happen?
This is called an inventory write-down. A journal entry must be made about the difference between the original ending balance and the final ending balance.
What is the LCM rule?
inventory is reported at its market value (the amount paid to acquire it)
Why do firms do a physical count of inventory at least annually?
To count what was actually sold, and compare it to what was bought (can see if anything has been stolen).
What is inventory shrinkage?
When inventory disappears, and shrunk from something other than people actually buying the product (stealing or workers using the inventory and not paying).
What would be included in a shrinkage journal entry?
Debit: Shrinkage loss (+E)
Credit: Inventory (-A)
Equation for Inventory Turnover Ratio:
COGS/Average inv. (beg. inv. + end inv./2)
Equation for Accounts Receivable Turnover Ratio:
Sales/Avg. accounts receivable (beg. A/R + end. A/R / 2)
Equation for the days to sell inventory:
365/inventory turnover ratio (lower is better)
What does the inventory turnover ratio and days to sell inventory tell investors?
The higher the ITR means the company is selling quickly (good, effective management)
The lower the number of days indicated that the company can quickly convert inventory into cash
How could a firm increase its inventory turnover ratio?
Reduce your inventory or increase how much you are selling
