Exam 4 Flashcards
Inventory refers to the
Assets of a company
Inventory intends to sell
During normal course of business
Inventory doesnt include
PP&E or office supplies
Merchandise inventory
Good purchased in finished form
Cost of inventory (Equation) =
Purchase price + Cost to ship
Manufacturing Inventory
Goods produced by manufacturing company
Manufacturing inventory consist of
Raw materials, WIP, and Finished goods
Perpetual system
Continually adjusts inventory for each change in inventory
INVENTORY ACCOUNT IS DEBITED DIRECTLY WITH
PURCHASES
Periodic inventory system
Adjust inventory account/records COGS at end of each reporting period
Records merchandise, purchase returns, discounts and freight-in in (what account)
Temporary accounts
COGS (Equation) =
Beginning Inventory + Net Purchases - Ending inventory
PURCHASE ACCOUNT IS DEBITED WITH
PURCHASE OF INVENTORY UNDER PERIODIC SYSTEM
FOB Shipping point
Title transfers at shipping point
FOB Destination
Title transfers at destination
Goods on consignment
Included in inventory of consigned until sold by consignee
Sale is recorded by consigner when
Goods are sold
Average cost - periodic cost is calculated at the end of
end of the period
WEIGHTED AVERAGE COST (EQUATION) =
COGS/ NUMBER OF UNITS ON HAND
Average cost - perpetual is applied by computing moving average cost
Each time additional inventory is purchased
During rising cost, FIFO results in … COGS, and … inventory than LIFO
Lower, Higher
During declining Cost: FIFO results in … COGS, and … ending inventory than LIFO
Higher, lower
LIFO Conformity group prevents businesses from using LIFO to
Lower taxable income while showing higher profits using different methods
LIFO reserves (Equation) =
Inventory account balance under FIFO - Inventory account balance under LIFO
Adjustments to the COGS and the LIFO reserve are impacted by the prior balance to the
LIFO reserve account
GAAP requires that companies evaluate
Their unsold investor at the end of each reporting period
When expected in Peru is estimated to have fallen below cost it is a
Inventory write-down
Lower of cost or net realizable value is for companies who
Use FIFO, average cost or any method besides LIFO
Lower of cost or market, for companies that use
LIFO or retail inventory method
NRV =
Estimated selling price - cost of completion, disposal, and transportation
NRV is the amount a company expected
To realize from sale inventory
If NRV is lower than cost
Adjustment is needed
If cost is Lower than NRV than
No adjustment is needed
Lower cost of market
Companies that use LIFO or Retail inventory method report inventory with LCM
Gross profit method is useful in situations where estimates of inventory are desirable to
Determine cost of inventory thats been lost or inventory/COGS for interim reports
Retail investor method For high volume retailers
selling different items at low unit prices
WHEN USING AVERAGE COST RETAIL METHOD
NET MARKUPS AND MARKDOWNS ARE INCLUDED IN THE COST TO RETAIL PERCENTAGE
WHEN USING CINVETIONAL RETIAL METHOD, ONLY
NET MARKUPS ARE INCLUDED IN THE COST-TO-RETAIL PERCENTAGE
THE COST TO RETIAL PERCENTAGE IS CALCUALTED SEPERATLEY FOR THE BEGINNING INVENTORY AND
THE CURRENT PERIODS LAYER
COST-TO-RETAIL METHOF ONLY NET MARKUPS AND MARKDOWNS
ARE INCLUDED IN THE COST-TO-RETAIL PERCENTAGE
Financial reporting refers to the process of printing financial information to
External users like investors and creditors
GAAP is a dynamic set of both
Broad and specific guidelines
Income statement is a
Change statement that covers a period of time
Balance sheet provides
Assets, liabilities and equity
Limitations of balance sheet
The book value of companies is not a direct meansure of its market value because assets are measured at historical cost, and not all resources are considered assets
Single step income statement
All revenues/gains are listed and all expenses + losses are listed
Multistep income statement
Separately classifies statements by operating/non-operating, reports series of intermediate subtotals, classifiers revenues + expenses by function
Steps to recognize revenue
1) Identify contract 2) identify performance obligations 3) determine price 4) allocate transaction price 5) recognize revenue as/is completed
Revenue recognized over time if any of 3 are met
1) Consumer consumes benefit
2) consumer is in control of asset
3) Seller created asset that has no alternative use
Cash equilvealnts
Have maturity date of no longer than 3 months
CASH AND CASH EQUIVLANTS DOES NOT INCLUDE
RESTRICTED CASH
Allowance method (GAAP) Companies use a contra account
Allowance for uncollectible accounts to reduce carrying value of A/R
Bad debt expense is not recognized when
Specific accounts are written off, when accounts are stimated to be uncollectable
INTEREST ON NOTES (EQUATION) =
FACE AMOUNT * ANNUAL RATE * FRACTION OF THE ANNUAL PERIOD
FACTORING ARRANGEMENT IS DONE TO HAVE
QUICKER ACCESS TO CASH
