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Financial Accounting > Chapter 8: Valuation of Inventories: A Cost-Basis Approach > Flashcards

Chapter 8: Valuation of Inventories: A Cost-Basis Approach Flashcards

1
Q

What is the periodic inventory system?

A
  • 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
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2
Q

What is the perpetual inventory system?

A
  • Continuously tracks changes in inventory
  • Inventory is recorded directly to inventory account as they occur
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3
Q

What are the journal entries for inventory in a periodic system?

A

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

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4
Q

What are the journal entries for inventory in a perpetual system?

A

Purchase

Inventory XXX

Cash (A/P) XXX

Sale

Cash (A/R) XXX

Sales Revenue XXX

COGS XXX

Inventory XXX

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5
Q

What is f.o.b. shipping point?

A
  • Title transfer once shipped and goods belongs to the buyer while in transit
  • Buyer pays freight costs
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6
Q

What is f.o.b. destination?

A
  • Title transfer once buyer receives goods
  • Goods belong to the seller while in transit
  • Seller pays freight costs
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7
Q

What are consigned goods?

Who owns title to these goods?

A

Inventory held and sold by a third-party.

The seller keeps title throughout arrangement.

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8
Q

Describe sales with high rates of returns.

Who owns title to these goods?

A

Permit buyers to return inventory for a full or partial refund.

The buyer, but an estimate inventory return is recognized for the seller.

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9
Q

Describe repurchase agreements.

Who owns title to these goods?

A

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.

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10
Q

What are the journal entries for purchases made under periodic system using the gross method?

A

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

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11
Q

What are the journal entries for purchases made under perpetual system using the gross method?

A

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

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12
Q

What are the journal entries for purchases made under periodic system using the net method?

A

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)

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13
Q

What are the journal entries for purchases made under perpetual system using the net method?

A

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

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14
Q

What is a cost flow assumption?

Identify the 4 types.

A

An assumption about which units are sold first and what are their costs.

  1. Specific identification
  2. Average-cost
  3. FIFO
  4. LIFO
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15
Q

What is the specific identification cost flow assumption?

A

Each item in inventory has a unique identifier and its cost can be traced to it directly.

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16
Q

What is the average cost cost flow assumption?

A

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

17
Q

What is the LIFO cost flow assumption?

A

Last cost in is the first to flow to COGS.

18
Q

What is the FIFO cost flow assumption?

A

The earliest cost in is the first to flow to COGS.

19
Q

What is the effect of LIFO in periods of rising prices?

A
  • Lowest inventory
  • Highest COGS
  • Lowest NI
  • Lowest taxes
20
Q

What is the effect of FIFO in periods of rising prices?

A
  • Highest inventory
  • Lowest COGS
  • Highest NI
  • Highest taxes
21
Q

What is the effect of LIFO in periods of falling prices?

A
  • Highest inventory
  • Lowest COGS
  • Highest NI
  • Highest taxes
22
Q

What is the effect of FIFO in periods of falling prices?

A
  • Lowest inventory
  • Highest COGS
  • Lowest NI
  • Lowest taxes
23
Q

What is the LIFO reserve?

What is the journal entry to record this reserve?

Is there a disclosure needed?

A

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.

24
Q

What is a LIFO pool?

A

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
25
Q

What is dollar value LIFO?

A

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
26
Q

What is LIFO liquidation?

A

Erosion of your lastest layers quickly, so that older lower costs are included in net income. This increases net income and tax payments .

Financial Accounting (21 decks)

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