Module 6 Flashcards
Consistency Principle:
A business should use the same accounting methods and
procedures from period to period.
Disclosure Principle:
A business‘s financial statements must report enough
information for outsiders to make knowledgeable
decisions about the company. • Relevant:
Would impact a user in their decision making
• Faithful Representation:
Complete & free from error
Materiality Concept:
A company must perform strictly proper accounting only
for items that are significant to the business‘s financial
situation. • Material: When it would cause someone to change
their decision. • Immaterial: GAAP(X)
Conservatism:
A business should report the least favorable figures in
the financial statements when two or more options are
presented.
When two or more possible options are presented,
choose the option that undervalues rather than
overvalues your business.
Good Controls:
Ensure inventory purchases and sales are properly authorized and accounted for.
Perpetual Inventory System:
Keeps a running computerized record of merchandise inventory.
Inventory Costing Methods:
A method of approximating the flow of inventory costs in a business that is used to determine the amount of
cost of goods sold and ending merchandise inventory.
Specific Identification Method:
An inventory costing method based on the specific cost of particular units of inventory.
Inventory Costing Methods – First-In, First-Out (FIFO):
An inventory costing method in which the first costs into inventory are the first costs out to cost of goods
sold. Ending inventory is based on the costs of the most recent purchases.
Cost of Goods Available for Sales:
The total cost spent on inventory that was available to be sold during the period.
Last-In, First-Out (LIFO):
An inventory costing method in which the last costs into inventory are the first costs out to cost of goods
sold. The method leaves the oldest costs (those of beginning inventory and the earliest purchases of the
period) in ending inventory
Weighted-Average:
An inventory costing method based on the weighted-average cost per unit of inventory that is calculated
after each purchase.
Weighted-Average Cost Per Unit = Cost of Goods Available for Sale / Number of Units Available
How do businesses decide which inventory costing method to use?
Different methods have different benefits! We assume rising prices!
Management:
• „Let‘s choose the FIFO method so we can report a higher net income to attract investors and borrow money at more favorable terms.“
• „Let‘s choose the LIFO method so we can report a lower net income and pay fewer income taxes.“
Why have we been ignoring the specific Identification method?
- The results of this method will vary depending on which costs are assigned to the inventory units sold
- This method is not used much in practice
Why do businesses want to sell their merchandise as fast as possible?
- No profit until inventory is sold
- Less likely inventory will become obsolete, spoiled, or out-of-style
- Less storage costs
- Less insurance costs on inventory
