Chapter 8: Valuation of Inventories: A Cost-Basis Approach Flashcards
What is the periodic inventory system?
- Uses purchases account to record inventory
- Inventory account represents beginning inventory
- Beginning inventory is close out and ending inventory is recorded, at the end of the period
- Ending inventory is determined by physical count
- Ending inventory is valued at the LCM
What is the perpetual inventory system?
- Continuously tracks changes in inventory
- Inventory is recorded directly to inventory account as they occur
What are the journal entries for inventory in a periodic system?
Purchase
Purchase XXX
Cash (A/P) XXX
Sale
Cash (A/R) XXX
Sales Revenue XXX
Year-end adjustment
COGS XXX
Inventory (ending) XXX
Inventory (beginning) XXX
Purchases XXX
What are the journal entries for inventory in a perpetual system?
Purchase
Inventory XXX
Cash (A/P) XXX
Sale
Cash (A/R) XXX
Sales Revenue XXX
COGS XXX
Inventory XXX
What is f.o.b. shipping point?
- Title transfer once shipped and goods belongs to the buyer while in transit
- Buyer pays freight costs
What is f.o.b. destination?
- Title transfer once buyer receives goods
- Goods belong to the seller while in transit
- Seller pays freight costs
What are consigned goods?
Who owns title to these goods?
Inventory held and sold by a third-party.
The seller keeps title throughout arrangement.
Describe sales with high rates of returns.
Who owns title to these goods?
Permit buyers to return inventory for a full or partial refund.
The buyer, but an estimate inventory return is recognized for the seller.
Describe repurchase agreements.
Who owns title to these goods?
Sale of goods with the intention to purchase back goods at a later date.
The seller keeps title because they retain control of the inventory.
What are the journal entries for purchases made under periodic system using the gross method?
Purchase
Purchase XXX (Full amount)
A/P XXX
Paying in discount period
A/P XXX (Full amount)
Purchase discounts (Full Amount * Discount %) XXX
Cash (Full Amount - Discount) XXX
Not paying in discount period
A/P XXX (Full Amount)
Cash XXX
What are the journal entries for purchases made under perpetual system using the gross method?
Purchase
Inventory (Full Amount) XXX
A/P (Full Amount) XXX
Paying in discount period
A/P (Full Amount) XXX
Inventory (Full Amount * Discount%) XXX
Cash (Full Amount - Discount) XXX
Not paying in discount period
A/P (Full Amount) XXX
Cash (Full Amount) XXX
What are the journal entries for purchases made under periodic system using the net method?
Purchase
Purchase (Full Amount net Discount) XXX
A/P (Full Amount net Discount) XXX
Paying in discount period
A/P (Full Amount net Discount) XXX
Cash (Full Amount net Discount) XXX
Not paying in discount period
A/P (Full Amount net Discount) XXX
Purchase Discount Lost (Full Amount * Discount %) XXX
Cash (Full Amount XXX)
What are the journal entries for purchases made under perpetual system using the net method?
Purchase
Inventory (Full Amount net Discount) XXX
A/P (Full Amount net Discount) XXX
Paying in discount period
A/P (Full Amount net Discount) XXX
Cash (Full Amount net Discount) XXX
Not paying in discount period
A/P (Full Amount net Discount) XXX
Purchase Discount Lost (Full Amount * Discount %) XXX
Cash (Full Amount) XXX
What is a cost flow assumption?
Identify the 4 types.
An assumption about which units are sold first and what are their costs.
- Specific identification
- Average-cost
- FIFO
- LIFO
What is the specific identification cost flow assumption?
Each item in inventory has a unique identifier and its cost can be traced to it directly.
What is the average cost cost flow assumption?
Cost of each unit is determined by the average cost of all similar goods availabe for sale during the period.
- Periodic method = weighted averages
- Perpetual method = moving averages
Cost of unit * # of units
divided by
Total # units
What is the LIFO cost flow assumption?
Last cost in is the first to flow to COGS.
What is the FIFO cost flow assumption?
The earliest cost in is the first to flow to COGS.
What is the effect of LIFO in periods of rising prices?
- Lowest inventory
- Highest COGS
- Lowest NI
- Lowest taxes
What is the effect of FIFO in periods of rising prices?
- Highest inventory
- Lowest COGS
- Highest NI
- Highest taxes
What is the effect of LIFO in periods of falling prices?
- Highest inventory
- Lowest COGS
- Highest NI
- Highest taxes
What is the effect of FIFO in periods of falling prices?
- Lowest inventory
- Highest COGS
- Lowest NI
- Lowest taxes
What is the LIFO reserve?
What is the journal entry to record this reserve?
Is there a disclosure needed?
The difference between inventory reported using LIFO and inventory reported using FIFO.
When FIFO > LIFO
COGS XXX
Allowance to Reduce Inventory to LIFO XXX
When FIFO < LIFO
Allowance to Increase Inventory to LIFO XXX
COGS XXX
Amount disclosed in footnotes.
What is a LIFO pool?
Pooling together similar items and accounting for them as a group.
- All purchases considered made at the same time and cost
- Reduces probability of liquidation due to offsetting
- Disadvantage: pool is based on quantities, so companies have to continually update the pool when adding or decreasing products
What is dollar value LIFO?
Inventory pooled based on total dollar value instead of quantity.
- Greater variety of goods can be included, so fewer pools
- Less cost of accounting
- Smaller prbability of LIFO liquidation
What is LIFO liquidation?
Erosion of your lastest layers quickly, so that older lower costs are included in net income. This increases net income and tax payments .
