Module 21 Flashcards
The dead costs included included in inventories on the balance
product costs
Product costs are _______ in the inventories (asset) account on the _______.
Capitalized
Balance sheet
Absorption costing, which includes costs including labor and overhead are _____ costs, a type of ____ cost.
conversion/manufacturing
product costs (capitalized on balance sheet)
Inventories hit the income statement as ____ when ______.
COGS (expense)
they are sold
Costs that are expensed when they are incurred:
-abnormal waste
-finished goods storage costs
-admin overhead
-selling costs (freight-out)
period costs
Trade discounts are _______ inventory costs (product costs).
subtract from inventory expense
Inventory valuation method that best matches the physical flow of the inventory items because it tracks the actual units that are sold
Specific identification
Which inventory valuation method is best used for inventory items are not interchangeable?
specific identification
Inventory values and COGS are updated continuously
perpetual inventory system
How does the perpetual inventory stem impact the inventory valuation methods?
No Change: FIFO and specific identification
Change: LIFO and weighted average costs
LIFO & FIFO relationships remain
When calculating that current ratio, what impact will the inventory have on the numerator and denominator?
Impacts Numerator: Assets- includes inventory
No impact denominator: accounts payable is to suppliers, not based on inventory accounting
In a period of rising price, LIFO will result in _____ inventory and ____ cost of sales
lower inventory, cheaper inventory is still held
higher COGS because of more expensive current inventory prices
Inventory valuation methods relate to the debt-to-equity ratio through?
Equity: net income and inventory
The LIFO reserve is the amount by which the LIFO _____ is less than the FIFO.
inventory
FIFO inventory - LIFO inventory
LIFO liquidation occurs when a firm’s inventories ______.
Decline
In a period of rising prices, LIFO liquidation results in
Higher earnings
Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.
Write-downs occur when
NRV < Inventory value on BS
Loss is recognized on income statement
Write ups affect the income statement how?
gain is recognized by reducing the COGS by the recovery amount (NRV- inventory value)
Lower of cost or market methods are used for which inventory valuation methods?
LIFO (GAAP) or retail
The market value can be used when it is in a range of:
NRV - profit margin < Market value < NRV
The effect of an inventory writedown on a firm’s return on assets (ROA) is:
lower ROA; Writing down inventory to net realizable value decreases both net income and total assets in the period of the write-down. Because net income is most likely less than assets, the result in the period is a decrease in ROA.
Using the lower of cost or market principle under U.S. GAAP, if the market value of inventory falls below its historical cost, the minimum value at which the inventory can be reported in the financial statements is the:
When inventory is written down to market, the replacement cost of the inventory is its market value
A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change
prospectively, with the carrying value as the first LIFO layer.
Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.
When a company wrote down their inventory to NRV in year 1 and then in year 2 inventory increased above NRV, how would firms report under IFRS and GAAP
Under IFRS, a firm that has written down inventory to net realizable value may record any subsequent reversal (limited to the original writedown amount) as a gain on the income statement. Under U.S. GAAP, reversals of inventory writedowns are not permitted.
When the sales growth rate exceeds the finished goods inventory growth rate it indicates that:
effective inventory management
the company is managing to service its increased sales level with a relatively lower level of inventory, indicating effective inventory management
Low inventory turnover (high number of days in inventory) may be a sign of
slow-moving or obsolete inventory
No _____ account is needed for a perpetual system
purchases
Companies can covert _____ to ____, but not the other way around. Which create the _______.
LIFO to FIFO
LIFO reserve
Arises when the number of units sold exceeds the number of units purchased or manufactured, so a portion of the older inventory is thus sold off
LIFO Liquidation
older inventory is liquidated; the statement means that units manufactured (or purchased) equaled or exceeded unit sales for each year.
IFRS & GAPP Inventory write-downs:
inventory is written down to net realizable value, for both GAAP & IFRS
When finished goods are increasing faster than both raw materials and work in progress goods, this suggests:
That there is a decline in demand, and a strong likelihood of future write-downs
