Inventories and the Cost of Goods Sold Flashcards
define inventory
consists of all goods owned and held for sale to customers
expected to be converted into cash within the company’s operating cycle
where is inventory listed
it is listed after the accounts receivable in the balance sheet because it is just one step farther from conversion into cash
inventory is a what
non-financial asset
what happens when items from the inventory are sold
their costs are removed from the balance sheet and transferred to the COST OF GOODS SOLD — cogs is a contra against sales revenue in the income statement
enumerate the flow of costs through financial statements
purchase cost -> incurred as an asset in inventory
when goods are sold:
INCOME STATEMENT
Revenue COGS Gross profit EXPENSES Net income
what is the company’s largest asset and expense?
inventory and cost of goods sold
what’s the process when identical items are acquired at different costs
a new COST LAYER is created whenever units are acquired at a different per-unit cost
when an item is purchased, what cost should be removed from the inventory account and recognized as the cost of goods sold — whats the process in identifying the mentioned?
- specific identification
2. cost flow assumption
define cost flow assumption
the seller simply makes an assumption as to the sequence in which units are withfrawn from the inventory
utilized when a company has a large number of IDENTICAL items that were purchased at DIFFERENT items
3 cost flow assumptions:
average cost
fifo
lifo
define average cost
values all merchanndise at the average per unit cost
units are withdrawn from the inventory in random order
FIFO
goods sold are the FIRST UNITS that were purchased
Remaining inventory are the OLDEST goods on hand
LIGO
Goods sold are the MOST RECENTLY PURCHASED
Remaining inventory consists of earliest purchases
what happens when AC method is used
all units in the inventory is computed after EVERY purchase
how to compute for ac using perpetual method
total cost of goods available for sale (cogas) / total number of units in the inventory
what are the entries in the journal when a sale is made
debit increase cash
credit increase revenue
debit increase cost of goods sold
credit decrease inventory
define fifo
first merchandise purchased is the first merchandise sold
what kind of entry is made with the fifo mathod
debit increase cogs
credit decrease inventory
define lifo
most recently purchased merchandise (LAST IN) is assumed to be sold first
most widely used method in determining cogs
what is the transaction under this method lifo
cogs debit increase
inventory debit decrease
what is the only requirement in using a cost flow assumption
units sold must be HOMOGENOUS in nature
when is specific identification used
for inventories of high-priced, low volume items
each item in the inventory is unique (paintings, jewelry, real estate)
when is a physical inventory taken
at the end of the company’s fiscal year
why is a physical inventory needed
to adjust the perpetual inventory for unrecorded SHRINKAGE LOSSES (thefts, spoilage, breakage)
fob shipping point vs destination
shipping point — goods are owned by the seller once it’s in transit
destination — goods are still owned by the seller UNTIL it reaches the buyer
in a periodic inventory system, where is the cost of merchandise purchased debited to?
it is debited in the PURCHASES ACCOUNT
inventory — perpetual
PURCHASES — periodic
enumerate the specific identification process in periodic inventory system
COGAS — ending inventory = COGS
how is average cost determined?
total cogas / total number of units available for sale
fifo lifo periodic inventory
oldest units are sold first
latest units purchased are the first sold
2 techniques in estimating the cost of goods sold and ending inventory
gross profit method and retail method
define gross profit method
rate of gross profit earned in the preceding year will remain the same for the current year
how do you utilize the gross profit method
divide the dollar amount of net sales into two elements 1) gross profit 2) cogs
net sales is viewed as 100%
how is cogs percentage determined
cost ratio
determined by gross profit rate - 100%
how is the ending inventory estimated?
- determine cogas from the beginning inventory and net purchases
- estimate cogs by multiplying NET SALES AND COST RATIO
- deduct cogs from cogas to find out the estimated ending inventory
define the retail method
similar to gross profit method
retail method requires that management determine the value of ending inventory at RETAIL PRICES
value of ending inventory is then converted to its approximate cost using cost ratio
