WEEK 3 Flashcards
merchandising
Company where items have 2 characteristics
1) they are owned by the company
2) they are in a form ready for sale.
goods in transit
onboard a truck, trains, ship, or plane
whats difficult about goods in transit?
who’s the owner?
consigned goods
hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods
two assumed cost flow methods
- FIFO
- average cost
The cost of goods sold formula in a periodic system is
(Beginning Inventory + Purchases) – Ending Inventory = Cost of Goods Sold
In a period of inflation, which method produces a higher net income — FIFO or average-cost — and why?
FIFO produces a higher net income because it matches older, lower costs with current revenues.
What happens when prices are falling — how do FIFO and average-cost compare?
The effects reverse: FIFO reports the lowest net income, and average-cost reports higher income.
Why does FIFO often result in higher taxes during inflationary periods?
Because FIFO shows higher profits, it results in higher taxable income.
consistency concept
a company uses the same accounting principles and methods from year to year. (Otherwise, it would be different to compare the net incomes of two years).
What happens if beginning inventory is understated?
COGS is understated
Net income is overstated
What happens if beginning inventory is overstated?
COGS is overstated
Net income is understated
What happens if ending inventory is understated?
COGS is overstated
Net income is understated
What happens if ending inventory is overstated?
COGS is understated
Net income is overstated
How does an error in ending inventory affect the next period?
The error reverses:
If ending inventory is understated in 2025, it understates beginning inventory in 2026 and overstates 2026 net income.
Lower-of-cost-or-market (LCM)
a basis whereby inventory is stated at the lower of either its cost or market value as determined by current replacement cost. Companies who sell high-technology or fashion goods may do this because the value of inventory can drop very quickly due to continual changes in technology or fashions.
formulas en tabellen!
The results under FIFO in a perpetual system are the same as in a periodic system
What is the moving average method in a perpetual inventory system?
A method where a new average cost per unit is computed after each purchase and used for costing both COGS and ending inventory.
In a perpetual system, when is the average cost updated under the moving average method?
After every purchase of inventory.
How is cost of goods sold (COGS) determined using the moving average method?
Multiply the current average cost per unit by the number of units sold.
Under moving average, how is ending inventory calculated?
Multiply the current average cost per unit by the remaining units on hand.
What are the two main methods for estimating ending inventory?
Gross Profit Method
Retail Inventory Method
Q: What is the gross profit method used for?
A: To estimate cost of ending inventory by applying a gross profit rate to net sales.
Q: What is the retail inventory method used for?
A: To estimate inventory at cost by applying a cost-to-retail ratio to the ending inventory at retail.
