Module 25.1: Cost Flow Methods Flashcards
What is the formula for COGS?
COGS = beginning inventory + purchases - ending inventory
What costs should be included in the valuation of inventory for IFRS and GAAP?
all of the product costs:
1) purchase cost less trade discounts and rebates
2) conversion costs including labor and overhead
3) other costs necessary to bring the inventory to its present location
What are period costs? List the 4 largest
inventory costs that are expensed in the period incurred. Examples include:
1) abnormal waste of materials, labor, and overhead
2) storage costs
3) administrative costs
4) selling costs
What are the permissable methods of cost flow under IFRS?
1) Specific Identification
2) FIFO
3) Weighted Average Cost
What are the permissible methods of cost flow under GAAP?
1) Specific Identification
2) FIFO
3) LIFO
4) Weighted Average Cost
What is specific identification cost flow method? When is it appropriate?
each unit sold is matched with its actual cost. It is appropriate when inventory items are not interchangeable and is commonly used by firms with small number of costly and easily distinguishable items
What is First in First Out and when is it most appropriate to use?
first item to be purchased is the first one sold. if you use FIFO in an inflationary environment, COGS will be understated and earnings will be overstated.
What is LIFO and when is it most appropriate?
the item purchased most recently is assumed to be the first one sold. In an inflationary environment, COGS will be overstated and earnings will be understated. Low earnings equal lower income taxes and increase cash flow.
What is weighted average cost cost flow method and when is it appropriate?
average cost per unit is computed by dividing the total cost of goods by the units available for sale. In an inflationary environment, WAC will be between LIFO and FIFO.
