Session 7

Question 1

What is the average cost method?

Answer 1

Cost of goods available for sale / amount of units = Average cost per unit
→ make calculations based on cost from the above

Question 2

What is the cost principle?

Answer 2

method that requires inventory be recorded at the price paid to acquire it, including costs necessary to bring the inventory to its present condition and location
Invoice price
Freight
Inspection costs
Preparation costs
MINUS DISCOUNTS

Question 3

What is FIFO - what are the benefits?

Answer 3

‘First-in, first-out’ method (in respect to the COGS expense calculation)
→when calculating COGS expense, start with the first XX available units
→when calculating Ending Inventory, start with LAST XX available units
***more aligned with actual physical flow of goods (i.e., items at a store that are made first are typically placed on the shelf and sold first)

Question 4

What is LIFO? What are the benefits?

Answer 4

‘Last-in, last-out’ (in respect to COGS expense) – mostly allowed in US
→when calculating COGS expense, start with the LAST XX available units
→when calculating Ending Inventory, start with FIRST XX available units
*** Allows matching with more recent/current prices (accounts for inflation)

Question 5

What is LIFO reserve?

Answer 5

Difference between company’s inventory values at LIFO and what it would be under FIFO
Balance in the reserve indicates cumulative effect on gross profit over all prior years due to LIFO
Required for all companies using LIFO

Question 6

What is the Lower-of-Cost-or-Market Method (LCM)?

Answer 6

When an asset’s value on the balance sheet exceeds its fair market value
Asset is ‘impaired’
Companies must REDUCE value of the asset to the lower fair market value and recognize an expense/loss
Non-cash loss or expense
Happens due to things such as damage or lack of demand by customers

Question 7

What is the process for asset-related expenditures that will give a benefit of more than one year? One year or less?

Answer 7

*** Asset-related expenditures that will benefit more than one year are capitalized
Expense deferred, and current income is higher

*** Expenditures that provide benefit lasting one year or less are expensed in current year (aka Revenue expenditures)
Expense recognized immediately, and current income is lower