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Chptr 5 Accounting
University of Oregon Accounting 211 Chapter 5
| Question | Answer |
|---|---|
| What is merchandise Inventory? | all goods that a company owns and holds for sales regardless of where goods are located regardless of where they are located when counted. |
| Are damaged or obsolete goods counted in inventory? | No if they cannot be sold but if salable they are included in the inventory at a conservative estimate of their net realizable value. |
| What is the damaged goods Net Realizable Value? | Sales Price-Cost of Making Sale The period when damage or obsolescence occurs is the period when the loss in value is reported |
| What is included in inventory costs? | Cost of expenditures necessary, directly or indirectly, to bring an item to a salable condition and location |
| What is the Inventory Cost Equation? | Invoice Cost-discount+any incidental cost necessary to put in place & conditions for sale. |
| What are incidental costs? | Include import duties, freight storage, insurance, and costs incurred in aging process. |
| What accounting principle is applied to inventory costs? | Matching; inventory cost should be recorded against revenue in the period when inventory is sold. |
| What is the materiality constraint? | An alternative to matching principle used by some companies to avoid assigning some individual costs of acquiring merchandise to inventory. Instead they expense them when incurred. |
| What can cause the inventory account balance to differ from actual inventory? | theft, loss, damage, and errors |
| What is FIFO? | assumes costs flow in the order incurred. 1st Purchased is sent to cost of goods sold on income statement first. |
| What is LIFO? | assumes cost flow in the reverse order incurred. Most recent item incurred is sent to cost of goods sold on income statement. |
| What is the Weighted Average? | assumes cost flow at an average cost available. |
| What is the Goods Available for Sale Equation? | COGS+ Ending Inventory |
| What is the appeal of LIFO? | Assigns most recent costs to COGS so it comes closest to matching current COGS with revenue. Yields lowest gross profit and net income which also yields temporary tax advantage by postponing payment of some income tax. |
| What is the appeal of FIFO? | Preferred when costs are rising and managers have incentives to report higher income for reasons such as bonuses, job security, and reputation. Mimics actual flow of goods. Better matches current costs with revenues in computing gross profits. |
| What happens when costs regularly decline? | FIFO gives highest cost of goods sold-yielding lowest gross profit and net income. The opposite holds true for LIFO |
| What is the appeal of Weighted Average | It tends to smooth out erratic changes inc costs. |
| What is the appeal of specific identification? | It exactly matches the costs of items with revenues they generate. |
| What is the LIFO conformity rule? | IRS requires that LIFO also be used in financial statements and tax reporting |
| What is the Lower Cost or Market Value (LCM)? | The accounting principle requires that inventory be reported at market value of replacing inventory when market value is lower than cost of inventory. Inventory is then said to be recorded on the balance sheet at lower cost. |
| What happens when the recorded cost of inventory is higher than the replacement cost? | A loss is recognized |
| What are the 3 ways that LCM can be applied? | 1. To each individual item 2. To major categories of items 3. To the whole of the inventory |
| What is the Conservatism Constraint? | It prescribes the use of the less optimistic amount when more than one estimate of the amount to be received or paid exists and theses estimates are about equally likely. |
| What is the equation for COGS? | Beg. Inventory+Net Purchases-Ending Inventory |
| If you underestimate Ending Inventory what occurs in your COGS and Net Income for the next two years? | COGS in year one is overstated and year 2 is understated. N.I. In year one is understated and yr two is overstated. |
| If you overestimate Ending Inventory what occurs in your COGS and Net Income for the next two years? | Yr 1 COGS is understated and overstated in year 2 Yr 1 N.I. is overstated and year 2 is understated |
| What is the Inventory Turnover equation and what does it measure? | COGS/Average Inventory How many times a company turns over (sells) its inventory during a period. Low ratio compared with competitors suggest inefficient use of assets. Higher means inventory is too low. |
| What is the Days Sale in Inventory equation? | Ending Inventory/COGS x 365 |
| What is the Net Sales equation? | Gross Sales -Sales Adjustments |
| What is the Net Purchases equation? | Purchases-Purchase Adjustments |
| What is the Net Cost of Purchases? | Net Purchases+Transportation in |
| What is the equation of Cost of Goods Sold? | B.I.+Net Cost of Purchases-Ending Inventory |
| What is the Equation for Gross Margin? | Net Sales-COGS |
| What is the Equation for Receivables Turnover? | Net Sales/Average Accounts Receivable |
| What is the Equation for Parables Turnover? | (COGS +/- Change in inventory)/ Average Accounts Payable |
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