Inventory Flashcards
under the perpetual method how is cost of goods sold determined using LIFO
perpetual system recognizes cost of goods sold based on the cost of goods acquired just prior to each sale
under the periodic method how is cost of goods sold determined using LIFO
whereas the periodic system recognizes cost of goods sold based on cost of goods acquired prior to the end of each period.
under the periodic/perpetual method how is cost of goods sold determined using LIFO
cost of goods sold for the period would be the same under both perpetual and periodic FIFO, using earliest goods acquired.
Does the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
YES
which method is more complex
perpetual system.The cost and quantity of each sale must be maintained so that the inventory and cost of goods sold accounts are “perpetually” current and correct.
List the attributes of First In First Out (FIFO).
- Most closely approximates actual physical flow of goods for most companies;
- Balance sheet valuation of inventory is at more desired current cost;
- Matching of revenues and expenses on income statement is not ideal.
List some reasons to avoid Last In First Out (LIFO) liquidation.
- Increases taxes;
* Does not match current period expenses and revenues.
List the reasons for a Last In First Out (LIFO) liquidation
- Poor planning;
* Lack of supply.
List the attributes of Last In First Out (LIFO)
- Matching of revenues and expenses is significantly improved over FIFO;
- Income tax advantages associated with LIFO;
- Balance sheet presentation is less than ideal.
What is the main reason for using Last In First Out (LIFO) in periods of rising costs?
Tax minimization.
What effect does using Last In First Out (LIFO) have on the income statement?
Matching of revenues and expenses on the income statement become significantly improved.
what does end inv reflect for FIFO
Reflects lastest costs
what does end inv reflect for LIFO
Reflects earliest costs
what does COGS reflect for LIFO
Reflects latest costs
what does COGS reflect for FIFO
Reflects earliest costs
Reflects latest costs
What does FIFO favor: BS or IS
favors balance sheet. But cost of goods sold (including income and gross margin) are less relevant and current. Most firms chose to maximize their profits.
What does LIFO favor: BS or IS
favors income statement. Cost of goods sold more relevant. But balance sheet non current.
A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?
Decrease ending inv and decrease net income.
Ending inventory would decrease because under LIFO, the latest items purchased (and therefore the most costly) are considered sold, leaving the earliest items purchased (and therefore the least costly) in inventory. This is opposite to the effect under FIFO.
The same is true for net income because now, under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.
Which inventory costing method would a company that wishes to maximize profits in a period of rising prices use?
FIFO assumes the sale of the earliest goods first. With rising prices, the earliest goods reflect the lowest prices. Therefore, cost of goods sold under FIFO is the lowest of the cost flow assumptions. With the lowest cost of goods sold, gross margin and income are the highest among the available cost flow assumptions (LIFO and average being the others).
When the FIFO inventory method is used during periods of rising prices, a perpetual inventory system results in an ending inventory cost that is
FIFO produces the same results for periodic and perpetual systems. FIFO always assumes the sale of the earliest goods acquired. Therefore, unlike LIFO periodic, goods can never be assumed sold before they are acquired.
Cost of goods sold and ending inventory are the same under FIFO for both a periodic and a perpetual system.
List the Dollar Valued (DV) Last In First Out (LIFO) conversion index formula.
Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars.
List the advantages of Dollar Valued (DV) Last In First Out (LIFO).
- Reduces the effect of the liquidation;
- Allows companies to use FIFO internally;
- Reduces clerical costs.
List the steps in applying Dollar Valued (DV) Last In First Out (LIFO retail method.
- DV LIFO is applied to inventory at retail;
- FIFO retail method cost/retail ratio is applied to retail layer;
- Cost layer is added to beginning inventory at DV LIFO cost.
Define “base-year dollars”.
Price level for the pool at the beginning of the year Dollar Valued (DV) Last In First Out (LIFO) adopted.
Why would an entity utilize Dollar Valued (DV) Last In First Out (LIFO)?
Reduces the effect of the LIFO liquidation.
How does the double-extension method affect ending inventory?
The ending inventory is extended at both base year cost and ending current year cost.
Estimates of price-level changes for specific inventories are required for which inventory method?
DV LIFO is based on price level indices. The ending inventory is determined at current cost, and then reduced to the price level existing at the base-year (the year LIFO was adopted). The ending inventory measured in base-year dollars is compared to beginning inventory measured in base-year dollars. The difference is the increase in inventory measured in base-year dollars. This difference is then raised to the current-year price level and added to beginning inventory DV LIFO, yielding ending inventory DV LIFO.
Thus, price-level changes are used throughout this method.
Price-level changes are used as a means of estimating the ending inventory. Individual item costs are not maintained or used in the valuation of inventory.
Generally, what is replacement cost?
Market cost.
How is the cost of ending inventory determined?
Determined by applying one of the four cost flow assumptions .
List the methods of recording Lower of Cost or Market.
Direct method or Allowance method.
How is the ceiling value of inventory calculated?
By reducing the sales price by the estimated cost to complete and sell the inventory.
How is holding loss reported under the allowance method?
Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.
How is holding loss reported under the direct method?
Any holding loss related to inventory is simply included in cost of goods sold.
What is the basis on which Lower of Cost or Market (LCM) can be applied?
- Individual Item, Category, Total Inventory;
* But must be consistent from year to year.
Define “market cost”.
Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.
List the formula to arrive at net realizable value
Sales price - estimated cost to complete and sell the inventory.
List the steps in Lower of Cost or Market (LCM) analysis.
- Compute market value;
* Value inventory at lower of cost or market.
