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ACFM 321 Exam 3
| Term | Definition |
|---|---|
| Inventory | Goods awaiting sale (finished goods), goods in course of production (work in process). and goods to be consumed directly or indirectly in production (raw materials) |
| Cost of Goods Sold | Expense that represents the cost of inventory sold during period |
| Raw Materials | Components purchased from suppliers that will become part of the finished product but have not yet been used in production |
| Work In Process | Products that have been started in production process but are not yet complete at end of period |
| Manufacturing Overhead | Electricity and other utility costs to operate manufacturing facility, depreciation of manufacturing equipment, and many other manufacturing costs that cannot be linked to production of specific goods |
| Finished Goods | Products that have been completed in manufacturing process but have not yet been sold |
| Perpetual Inventory System | System of accounting for inventory by continuously adjusting balance of inventory account for each purchase, sale, or return of inventory; COGS account is adjusted for each sale or return of inventory by customers |
| Periodic Inventory System | System of accounting for inventory that involves adjusting entry at end of period to update balance of inventory account and the COGS account for purchases, sales, and returns during period |
| Goods In Transit | Refer to inventory items that are being shipped from seller to buyer |
| FOB Shipping Point | Legal title to goods passes from seller to buyer at point of shipment (when seller delivers goods to common carrier); buyer is responsible for shipping costs and transit insurance |
| FOB Destination | Legal title to goods passes down from seller to buyer at point goods arrive at their destination (customer's location); seller is responsible for shipping costs and transit insurance |
| Goods On Consignment | Selling arrangement whereby consignor transfers goods to another company to sell, while retaining legal title to those goods |
| Product Costs | Costs associated with products and expenses as COGS only when related products are sold |
| Purchase Returns | Occurs when inventory is returned by buyer to seller |
| Purchase Discounts | Reductions in amount to be paid if payment is made within designated period of time |
| Special Identification Method | Each unit of inventory sold during period or each unit on hand at end of period is matched with its actual cost |
| Average Cost Method | Assumes COGS and ending inventory consist of a mixture of all goods available for sale |
| First-In, First-Out (FIFO) | Assumes that first inventory units purchased are first ones sold |
| Last-In, First-Out (LIFO) | Assumes that last inventory units purchased are first ones sold |
| True | True or False: Are these three methods permissible according to GAAP? |
| No, but they need a disclosure note | Does the company need to use the same method for its entire inventory? |
| What are the factors that influence method choice? | Physical flow, income taxes & net income, and how well costs are matched with associated revenue |
| LIFO Conformity Rule | IRS regulation that requires if company uses LIFO to measure taxable income, company must also use LIFO for external financial reporting |
| LIFO Reserves / Allowances | Contra account to inventory used to record difference between an alternative acceptable method of inventory accounting and LIFO |
| LIFO Liquidation | Decline in inventory quantity during period |
| Just-In-Time System | System used by manufacturer to coordinate production with suppliers so that raw materials or components arrive just as they are needed in production process |
| Gross Profit Ratio | (Net Sales - COGS) / Net Sales |
| Inventory Turnover Ratio | COGS / Average Inventory |
| Average Days in Inventory | 365 / Inventory Turnover Ratio |
| LIFO Inventory Pools | Groups of inventory units based on physical similarities of individual units and to reduce risk of LIFO layer liquidation |
| Dollar-Value LIFO | Inventory costing method comprising layers of dollar value from different periods and using cost indexes to adjust for changes in price levels over time |
| Cost Indexes | Cost in Layer Year / Cost in Base Year |
| DVL Inventory Estimation Techniques | Step 1: Convert ending inventory to base year cost, Step 2: Identify layers of ending inventory created each year, Step 3: Restate each layer using cost index in year acquired |
| Inventory Costs | Include all costs necessary to bring asset to its desired condition and location for use |
| COGS Square | Beginning Inventory + Net Purchases = COGAFS = COGS + Ending Inventory |
| Net Purchases | Purchases + Freight-In - Purchase Returns - Purchase Discounts |
| COGAFS | COGS + Ending Inventory |
| LIFO Reserve Steps | Step 1: Determine company's internal ending balance of FIFO and what LIFO needs to be externally, Step 2: Difference between them will be the ending balance of the account, Step 3: Book an adjusting entry to move LIFO reserve balance |
| Debit COGS, Credit LIFO Reserve | If LIFO Reserve needs to be increased what is the journal entry? |
| Debit LIFO Reserve, Credit COGS | If LIFO Reserve needs to be decreased what is the journal entry? |
| When inventory is typically more valuable | When do companies like to use perpetual inventory system? |
| When inventory is more low cost | When do companies like to use periodic inventory system? |
| Lower of Cost or Net Realizable Value | Subsequent measurement of inventory applied by companies that use FIFO, average cost, or any other method besides LIFO or retail inventory method |
| Net Realizable Value | Estimated selling prices of inventory in ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation |
| We need an adjusting entry to reduce inventory from its already reported purchase cost to lower NRV | If NRV is lower than cost |
| No adjusting entry is needed | If cost is lower than NRV |
| Lower of Cost or Market | Subsequent measurement of inventory applied by companies that use LIFO or retail inventory method |
| Market | Current replacement cost of inventory, not to exceed NRV or to be lower than NRV minus normal profit margin |
| It represents market | If replacement cost is between ceiling and floor |
| Ceiling or floor becomes market | If replacement cost is above ceiling or below floor |
| Gross Profit Method | Estimates COGS, which is then subtracted from COGAFS to estimate ending inventory |
| Gross Profit Ratio | (Net Sales - COGS) / (Total Sales - Sales Returns - Sales Discounts) |
| Retail Inventory Method Concept | Beginning Inventory @ Retail + Net Purchases @ Retail = Goods Available For Sale @ Retail - Net Sales = Ending Inventory @ Retail |
| Cost-To-Retail Percentage | Ratio found by dividing goods available for sale at cost by goods available for sale at retail |
| Initial Markup | Original amount of markup from cost to selling price |
| Additional Markup | Increase in selling price subsequent to initial markup |
| Markup Cancellation | Elimination of an additional markup |
| Markdown | Decrease in selling price subsequent to initial markup |
| Markdown Cancellation | Elimination of a markdown |
| Net Markup | Additional markup on selling price less any markup cancellations |
| Net Markdown | Markdown on selling price less any markdown cancellations |
| When inventory error is discovered following year | Need to reduce/add inventory & retained earnings to correct their balances, prior year statements are restated, and prior period adjustments do not flow through income statement but directly adjust retained earnings |
| When inventory error is discovered 2 years later | Would not require correction, financial statements are retrospectively restated, and disclosure note is needed |
| Debit COGS (if not substantial) or Inventory Write-Down Loss (if substantial), Credit Inventory | Journal Entry When Write-Down is needed for LCNRV or LCM |
Created by:
MOWGaming04
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