Inventory Flashcards
Does FIFO assume the most recent purchases are the last to be sold?
Yes. Because the first (oldest) purchases must be sold first, before the most recent purchases.
Does LIFO assume the most recent purchases are the first to be sold?
Yes
Does LIFO or FIFO approximate current cost?
LIFO. Because it assumes the most recent purchases (last in) are the first sold. So it matches current cost.
Clarify measurement of subsequent inventory to initial recognition
Replacement cost cannot exceed the NRV (ceiling) or be less than the NRV-npm (floor). If problem says replacement cost is above NRV-npm it’s good and market equals replacement cost. Then you can compare market to the original cost to determine inventory value under LCM.
Further explanation of floor
Market (replacement cost) cannot be LESS THAN a floor equal to NRV reduced by a normal profit margin
True or False. Weighted average method can be used for the perpetual inventory system.
False. It is used for the periodic inventory system. Because it determines an average cost only once at period end.
True or False. Moving average method can be used for the periodic inventory system.
False. It is used for the perpetual inventory system because it determines a new weighted average after each purchase. Thats why it’s “moving.”
Is FIFO ending inventory higher than LIFO during rising prices?
Yes. Because FIFO assumes the last purchased goods are still in inventory. LIFO assumes that these higher priced goods are the first sold.
What are total goods available for sale minus net purchases?
The beginning inventory in a periodic system that uses the weighted average cost flow method.
T or F. Freight out is a selling cost.
True. It is not part of inventorial cost.
What’s the inventory turnover ratio?
COGS divided by Average of beginning and ending inventory.
T or F. In times of inflation, FIFO has the lowest COGS and highest ending or average inventory.
True. The oldest First in purchases have the lower COGS. And the higher priced last in or most recent purchases are left in inventory.
Fun fact inventory
Overstated ending inventory means understated Cogs which means overstated NI. And overstated RE.
What’s the formula for dollar value life price index?
End of year cost divided by base year cost.
Moving average method fact:
Only used with perpetual system. Calculates new weighted average after every purchase.
Weighted Average formula
Used under the periodic system. Its cost of beginning inventory plus cost of purchases during the period divided by units in beginning inventory plus units purchased during the period.
Fun fact
Under FIFO year end inventory and COGS are the same regardless of whether the periodic or perpetual systems are used.
Highest ending inventory during inflation, lifo or fifo?
FIFO because the latest, higher priced purchases are left in n inventory.
During inflation, COGS is lowest with fifo or lifo?
FIFO.
During inflation, net income is highest with lifo or fifo?
FIFO, since it has the lowest COGS.
Fun fact
A disadvantage of LIFO is that current revenues are matched with older purchases.
Price index for dollar value lifo
Ending inventory at current year cost divided by ending inventory at base year cost
Fun fact COGS
Understating inventory, overstates the cost associated with the goods or COGS
COGS journal entry
When making a journal entry, COGS should be debited and purchases and inventory accounts should be credited, showing the assets have been sold and their costs moved to COGS
Fun fact
An advantage of the perpetual system is that it debits the actual cogs and credits inventory for each transaction.
A disadvantage of the periodic system is that it hides inventory shortages
