Receivables & inventory Flashcards
What is the recoverable amount?
the higher of the fair value less cost to sell or value in use: a. Fair value less cost to sell is the amount obtainable from the sale in an arms-length transaction between knowledgeable, willing and able parties. b. Value in use is the discounted present value of the futures cash flows expected from the asset.
What is a cash-generating unit?
the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets
What is a periodic inventory system?
the beginning inventory balance is reflected in the merchandise inventory account throughout the year. That is, the merchandise inventory account will have an unchanging balance throughout the accounting year. The firm uses other means to obtain current inventory information for internal purposes. The periodic system is much less expensive to administer than is the perpetual system. Acquisitions are recorded in purchases and other related accounts
What is the equation for cost of goods sold?
Net purchases = Gross Purchases + Transportation In (Freight In) - Purchases Returns and Allowances - Purchases Discounts Beginning Inventory + Net Purchases = Ending Inventory + Cost of Goods Sold
What are the 4 cost flow assumptions?
Specific identification, weighted average, LIFO, FIFO
Tell me about the Specific Identification cost flow assumption.
If the business entity has somewhat large, distinguishable products, it might be appropriate to use specific identification. The specific identification assumption is not cost effective for most firms and allows firms to manipulate earnings.
Tell me about the Weighted Average cost flow assumption.
The term weighted average always implies the periodic inventory system. If the business entity selects this cost flow assumption, the weighted average cost per unit must be calculated. This calculation is shown below. Weighted Average cost per unit = cost of goods available for sale / number of units available for sale The ending inventory valuation is equal to the number of units in ending inventory multiplied by the weighted average cost per unit The weighted average method treats each unit available for sale (beginning inventory and purchases) as if it were costed at the average cost during the period. It produces cost of goods sold and ending inventory results between those of FIFO and LIFO when prices change during the period.
Tell me about the FIFO cost flow assumption.
first-in, first-out philosophy. At the end of the accounting period, it is assumed the ending inventory is composed of units of inventory most recently acquired. Conversely, the cost of goods sold is made up of the oldest merchandise FIFO cost-flow assumption reflects the way most firms actually move their inventory. However, GAAP does not require that firms choose the inventory cost-flow assumption that reflects the actual movement of goods During periods of rising specific inventory prices, FIFO produces the highest net income because cost of goods sold is costed with the lowest-cost (earliest) purchases in the period. Ending inventory reflects the highest (latest) costs
Tell me about the LIFO cost flow assumption.
This cost flow assumption is based on a last-in, first-out philosophy. At the end of the accounting period, it is assumed the ending inventory is composed of the oldest inventory layers, while the cost of goods sold is composed of the units of inventory most recently acquired. During periods of rising specific inventory prices, LIFO produces the lowest net income because cost of goods sold is costed with the highest-cost (latest) purchases in the period. This feature of LIFO is considered an advantage because reported gross margin reflects the latest purchase costs and therefore is more indicative of future gross margin.
What are the main differences between the perpetual and periodic inventory system??
the use of the inventory account rather than purchases for the acquisition of inventory and adjustments such as returns and discounts; and the recording of cost of goods sold at sale rather than at the end of the period.
What are the cost flow assumptions associated with the perpetual inventory system?
Specific identification, moving average, FIFO, LIFO
What is the moving average?
The term moving average always implies the perpetual inventory system. That moving average is used for costing all subsequent sales until another purchase takes place, at which time the moving average is modified by the new purchase. When merchandise is sold, the current weighted average cost per unit is multiplied by the number of units sold to determine the amount of the cost-of-goods-sold entry. In a period of steadily rising prices, the moving average method (perpetual) results in lower cost of goods sold than the weighted average method (periodic).
Which cost flow assumption is the same in both the period and perpetual inventory system?
FIFO
Compare LIFO and FIFO
Ending Inventory Cost of goods sold FIFO Reflects latest costs Reflects earliest costs LIFO Reflects earliest costs Reflects latest costs If FIFO is employed by a business entity, the flow of costs is the same as the physical flow of goods for most firms. If FIFO is employed by a business entity, the balance sheet valuation of inventory is an approximation to current cost If FIFO is employed by a business entity however, the matching of revenues and expenses on the income statement is not considered ideal If LIFO is employed by a business entity, there are usually income tax advantages associated with that choice LIFO tends to minimize “inventory” profits
Why do firms chose various cost flow assumptions?
firms often choose FIFO to maximize their reported income. choosing LIFO is to minimize income tax
