Lesson 7 (Inventory) Flashcards
Which financial statement accounts are affected by the sale of a product on the income statement ?
- sales revenue
- cost of goods sold
which financial statement accounts are affected by the sale of a product on the balance sheet ?
- accounts receivable
- inventory
when do the inventory costs get expensed on the income statement ?
only when the inventory is sold
expenses are to be recorded in the same year they help generate revenues. revenue is earned when the sale is made, thus the expense cost of goods sold must be recorded when ?
in the same year they help generate revenues
are goods being shipped from the seller to the buyer and are thus on board a truck, train, ship or plane
what is this ?
goods in transit
ownership of goods passes to buyer as soon as the goods are shipped
which common shipping term is this ?
FOB (Free on Board) Shipping point
ownership of goods remains with the seller until the goods actually reach the buyer
which common shipping term is this ?
FOB (Free on Board) Destination point
represent inventory that was purchased and then returned to the seller (same idea as a sales return but from the buyers perspective)
what is this ?
purchase returns
represent discounts received for paying your suppliers early (same idea as a sales discount but from the buyers perspective)
what is this ?
purchase discounts
cost of transporting (shipping) inventory you have purchased to you
what is this?
freight in
represents the cost of transporting inventory to your customers but where you have agreed to pay the shipping costs
what is this ?
freight out
What are the 3 inventory cost flow methods ?
- FIFO (first in, first out)
- LIFO (last in, first out)
- Weighted average (average cost)
FIFO, LIFO, Weighted average is used to calculate what ?
ending inventory on the balance sheet and cost of goods sold on the income statement
What does FIFO stand for ?
First in, First Out
According to FIFO what costs are assigned to cost of goods sold, and what costs are assigned to ending inventory?
-oldest costs are assigned to cost of goods sold
-newest costs are assigned to ending inventory
What does LIFO stand for ?
Last in, First out
According to LIFO what costs are assigned to cost of goods sold and what costs are assigned to ending inventory ?
-newest costs assigned to cost of goods sold
-oldest costs assigned to ending inventory
Weighted average assumes what ?
all inventory items have the same cost. (old or new units does not matter)
This ‘same cost’ in the weighted average is called ?
weighted average cost per unit
FIFO LIFO Weighted average
These cost flow assumptions do not have to be consistent with the ?
actual flow of goods
FIFO LIFO Weighted average
These methods simply do what ?
assume flows of costs in order to calculate the amount of ending inventory and cost of goods sold
During inflation which method will show the highest net income ?
FIFO
Which method will show the highest total assets during inflation ?
FIFO
Which method will give an income tax advantage during inflation ?
LIFO
Which method shows ending inventory at its most acquisition costs during inflation or deflation ?
FIFO
Which method will show the highest net income during deflation ?
LIFO
Which method will show the highest total asset during deflation ?
LIFO
Which method will give an income tax advantage during deflation ?
FIFO
required that companies use the same accounting methods period after period so the financial statements of succeeding periods will be comparable
what is this ?
consistency principle
measures the number of times an average the inventory is sold during a period
what is this ?
inventory turnover
What’s the equation for inventory turnover ?
Cost of Goods Sold / Average Inventory = Inventory Turnover
How do you calculate average inventory ?
Inventory at Jan 1 + Inventory at Dec 31 / 2 = Average inventory
is an indication as to how quickly the company is selling its inventory
what is this ?
inventory turnover ratio
(higher the better)
measures the number of days on average between buying the inventory from suppliers and selling it to customers
what is this ?
number of days sales n inventory
What’s the equation for number of days sales in invneotory ?
365 / Inventory turnover = Number of days sales in inventory
(lower is better)
measures the number of days on average between buying inventory from suppliers and collecting cash from selling inventory to customers
what is this ?
operating cycle
How to calculate operating cycle ?
Number of days sale in inventory + average collection period = operating cycle
measures the percentage of the sales price of inventory that is gross profit
what is this ?
gross margin rate (gross profit rate)
How to calculate Gross margin rate (gross profit rate) ?
Gross margin (profit) / Net sales revenue = gross margin rate
(higher is better)
