chapter 7: FIFO bhaye Flashcards
what can inventory be used for
to sell them to customers
to make other goods or services which are to be sold
what re merchandisers
people that purchase products, and resell them to their customers
merchandise inventory
goods or merchandise held for resale in the ordinary course of the business
these are usually acquired in finished condition
ready to sell without further processing
raw materials inventory
acquired by purchase
grown such as food products
extracted like natural resources to turn into finished goods
work in process inventory
goods in the process of being manufactured but not yet complete
finished goods inventory
manufactured goods that are complete and ready for sale
when recording costs when acquiring inventory, are sales returns and discounts subtracted?
ye boy
direct labor costs and factory overhead costs are part of what type of inventory costs?
inventory costs in the manufacturing environment
direct labor costs
earnings of employees who work directly on the products being manufactured
factory overhead costs
all manufacturing costs that are not raw material or direct labour costs
what is the calculation for the costs of goods available for sale
sum of costs of beginning inventory and costs to new inventory added
what is the cost of sales equation?
costs of Beginning Inventory + costs of new inventory (P) - Ending Inventory
what inventory systems can be used to determine the costs of sales of a period and the cost of ending inventory of a period?
the perpetual inventory system
periodic inventory system
perpetual inventory system
explain how it works
purchase transactions are directly recorded in an inventory account
when each sale is recorded, costs of sales must be recorded in the same time as well, while decreasing inventory
up to date record maintained on transaction-by-transaction basis
when is the perpetual inventory system usually necessary?
purchasing decisions
manufacturing decisions
distribution decisions
periodic inventory system
ending inventory and costs of sales are determined at the end of the period based on physical count
to find costs, we use the costs of sales equation
we look at the costs to get the different products remaining
inventory purchases are debited to a temporary account called purchases
revenues are recorded at the time of each sale
companies must estimate the value of inventory on hand
why did people even start using the periodic system?
before computers and shit, it was low cost
what are the disadvantages of the periodic system?
lack of timely inventory information
managers don’t know if there is too much or not enough
what. made the perpetual inventory system better
offers more timeliness
what does FOB destination point mean?
ownership of the product changes hands once it gets to the destination of the buyer
what does FOB shipping point mean?
ownership of the product changes hands once it ships from the seller’s location
what are the three inventory costing methods
- specific identification
- FIFO
- Weighted average
what is the specific identification method?
cost of each item sold is individually identified and recorded as cost of sales
when is the specific identification method impractical?
when large quantities of similar items are kept in stock
when is the specific identification method most useful?
when dealing with very expensive items
how does the specifics identification method keep track of demand things?
- coding the purchase cost on each unit before placing it in stock
- keeping s separate record of the unit and identifying it with a serial number
true or false
the choice of an inventory costing method is based not he physical flow of goods on and off the shelves?
naaah boy that be false
this is why the methods are called cost flow assumptions
FIFO method
assumes the first units (first costs) are the first units sold
each purchase is added to stack of identical products in order of which was bought first
removed from stack in same sequence
weighted average cost method
requires computation of the weighted-average unit cost of goods available for sale
you keep track every sale and purchase
once you sell something, the remaining inventory of that batch that you sold is added to more recent inventory (with different cost) and you average their costs together
what is the difference in the statement of earnings between FIFO and weighted average?
when unit costs are rising, weighted average results in lower net earnings than FIFO
when unit costs are declining, weighted average results in higher net earnings than FIFO
what is the difference in the inventory valuation fort the statement of financial position between FIFO and weighted average?
when unit costs are rising, weighted average results in lower inventory valuation than FIFO
when unit costs are declining, weighted average results in higher inventory valuation than FIFO
furthermore, weighted average presents a mix of different costs, which can result in an unrealistic inventory valuation
can companies change inventory costing method juste de meme?
nah boy
only if it will make things clearer
when prices rise, which inventory costing method would a company use between FIFO and weighted average when they consider income tax
weighted average since it produces lower earnings before income tax
what can make the costs of inventories not be recoverable?
if the prices have declined
they have been damaged
have become obsolete
they will lose money in the end
what is net realizable value?
expected sales price - estimated selling costs
it measures inventories at the lower of cost and net realizable value
the lower of cost and net realizable value
valuation method departing from the cost principle
serves to recognize a loss when net realizable value of inventory drops below its cost
when is the consideration of the lower of cost and net realizable value most important? for which type of companies?
high-technology companies
seasonal companies
what are the effects of allowance for write downs of inventory to NRV on cost of sales, pretax earnings, and ending inventory on financial position at any period other than the period of sale?
costs of sale will increase
pretax earnings will decrease
ending inventory in statement of financial position will decrease
all by same amount
what are the effects of allowance for write downs of inventory to NRV on cost of sales, pretax earnings, and ending inventory on financial position at period of sale?
costs of sale will decrease
pretax earnings will increase
these two by same amount
ending inventory in statement of financial position will be unaffected (still decreased from previous write off)
it will remain reduced like this all year long unless the value of inventory increases once more
which are the most important inventory control features?
- separation of responsibilities for inventory accounting and physical handling of inventory
- storage of inventory in a manner that protects it from theft and damage
- limiting access to inventory to authorized employees
- maintaining perpetual inventory records
- comparing perpetual records to periodic physical accounts of inventory
if inventory is overstated in one accounting period, what are the effects to costs of sales and beginning inventory of the current and next period?
cost of sales of current period would be understated
in the next period beginning inventory would be overstated by same amount and costs of sales at the end of the period would be also overstated by the same amount
does an inventory overstatement affect net earnings after two or three periods?
nah boy
net earnings would stay the same as if it were fixed
inventory turnover ratio
calculation and meaning
you want to find out how efficient inventory management is
cost of sales / average inventory
365 / inventory turnover ration
reflects how many times inventory was purchased and sold during the year
the higher the ratio, the gyuer it is because it means less cash is spent on inventory
if it declines, it might mean demand for the company’s products id declining
true or false
inventory can be a major determinant of a company’s cash flows from operations?
true
what is the effect of a write down of lower of cost or net realizable value on the Cost of sales (Not the same as total cost of items available for sale)
it will increase the cost of sales by the amount the rite down
how do you find a write down
write down = total costs - LC and NRV valuation
what happens to costs of sales and cost of ending inventory when the net realizable value of an item increase after a write down has been made
the difference between the increase in the value and the value after the write down is a reversal of that write down
costs of sales will be reduced by the difference
cost of ending inventory will increase by that same amount
what would happen to the turnover ratio if inventory would to be deliver daily instead of weekly?
If parts inventory are delivered daily instead of weekly, then no need t0 stock large amounts of inventory
This reduces the average inventory and increases the turnover ratio
what would happen to the turnover ratio if payment period was extended?
Extending the payment period would not affect the cost of sales, nor would such action affect the inventory levels
As a result, inventory turnover would not change
what would happen to the turnover ratio if time to produce products would reduce?
finished products would be completed sooner and stocked in the warehouse
This will increase the average inventory
The cost of sales would not be affected by the shortened production process
Consequently, the turnover ratio is likely to decrease
when the sale terms are FOB destination point, who pays for the shipping?
buyer
when the sale terms are FOB shipping point, who pays for the shipping?
seller
