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45 Cards in this Set
- Front
- Back
INVENTORY
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Tangible property held for sale in the normal course of business, or used in producing goods or services for sale. pg 284
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MERCHANDISE INVENTORY
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Includes goods held for sale in the normal course of business. pg 284
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RAW MATERIALS INVENTORY
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Includes items acquired for the purpose of processing into finished goods. pg 284
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WORK IN PROGRESS (WIP) INVENTORY
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Includes goods in the process of being manufactured. pg 284
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FINISHED GOODS INVENTORY
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Includes manufactured goods that are complete and ready for sale. pg 284
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DIRECT LABOR
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Refers to the earnings of employees who work directly on the product being manufactured. pg 286
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FACTORY OVERHEAD
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Manufacturing costs that are not raw material or direct labor costs. pg 286
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GOODS "AVAILABLE" FOR SALE
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The sum of beginning inventory and purchases (or transfers to finished goods) for the period. pg 287
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COST OF GOODS SOLD EQUATION
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BI + P - EI = CGS
biginning inventory + purchases - ending inventory = cost of goods sold. pg 287 |
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SPECIFIC IDENTIFICATION METHOD
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Identifies the cost of the specific item that was sold.
pg 289 |
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FIFO
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First-in, first-out method assumes that the first goods purchased (the first in) are the first goods sold. pg 290
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LIFO
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Last-in, first-out method assumes that the most recently purchased units (the last in) are sold first.
pg 292 |
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AVERAGE COST METHOD
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Uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory. pg 292
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INCOME STATEMENT IS AFFECTED BY?
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Cost of goods sold. (COGS)
pg 294 |
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BALANCE SHEET IS AFFECTED BY?
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Inventory pg 294
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WEIGHTED AVERAGE COST METHOD
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Generally gives income and inventory amounts that are between the FIFO and LIFO extremes. pg 293
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"INCREASING COST" INVENTORIES
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For inventories with increasing costs, LIFO is used on the tax return because it normally results in lower income taxes.
pg 294 |
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"DECREASING COST" INVENTORIES
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For inventory with decreasing costs (most common), FIFO is most often used for both the tax return and financial statements.
pg 295 |
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WHEN UNIT COSTS ARE RISING..?
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LIFO produces lower income and and lower inventory valuation then FIFO. pg 294
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WHEN UNIT COSTS ARE DECLINING...?
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LIFO produces higher income and higher inventory valuation then FIFO. pg 294
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LEAST-LATEST RULE
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Managers prefer to pay the least amount of taxes allowed by law as late as possible. pg 294
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CONSISTENCY IN USE OF INVENTORY METHODS
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Requires companies to apply their accounting methods on a consistent basis over time. A company is not permitted to use LIFO one period, FIFO the next, and then back to LIFO. A change in method is allowed only if the change will improve the measurement of financial results and financial position. pg 295
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LCM RULE
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This rule is known as measuring inventory at the Lower of Cost or Market.
pg 297 |
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COST PRINCIPLE
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Inventories should be measured initially at their purchase cost. When inventoried goods can be replaced with identical goods at a lower cost, the lower cost should be used as the inventory valuation.
pg 297 |
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VALUE OF DAMAGED, OBSOLETE, OR DETERIORATED GOODS
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The current estimated net realizable value (sales price less costs to sell) if that is below cost. (LCM)
pg 297 |
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CONSERVATISM RETRAINT
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Departure from the cost principle; requires special care to avoid overstating assets and income. pg 297
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LOWER OF COST OR MARKET
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(LCM) Is a valuation method departing from the cost principle; it serves to recognize a loss when replacement cost or net realizable value drops below cost. pg 297
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REPLACEMENT COST
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The current purchase price for identical goods. pg 297
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NET REALIZABLE VALUE
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The expected sales price less selling costs (e.g., repair and disposal costs).
pg 297 |
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INVENTORY TURNOVER RATIO
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Inventory Turnover = Cost of Goods Sold/Average Inventory
Reflects how many times average inventory was produced and sold during the period. A higher ratio indicates that inventory moves more quickly through the production process to the ultimate customer, reducing storage and obsolescence costs. pg 298 |
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DECREASE IN INVENTORY FOR THE PERIOD
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Sales are greater then purchases; decrease must be ADDED in computing cash flows from operations. pg 300
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INCREASE N INVENTORY FOR THE PERIOD
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Sales are less then purchases; increase must be SUBTRACTED in computing cash flows from operations. pg 300
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DECREASE IN ACCOUNTS PAYABLE FOR THE PERIOD
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Payments to suppliers are greater then new purchases; the decrease must be SUBTRACTED in computing cash flows from operations. pg 300
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INCREASE IN ACCOUNTS PAYABLE FOR THE PERIOD
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Payments to suppliers is less then new purchases; the increase must be ADDED in computing cash flows from operations. pg 300
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LIFO RESERVE
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Is a contra-asset for the excess of FIFO over LIFO inventory. pg 302
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PERPETUAL INVENTORY SYSTEM
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Detailed up-to-date inventory record of 1)units and cost of beginning inventory, 2)units and cost of each purchase, 3)units and cost for the goods of each sale, and 4)units and cost of goods on hand at any point in time. pg 305
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PERIODIC INVENTORY SYSTEM
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NO up-to-date record of inventory is maintained during the year. A physical count of goods remaining on hand is required at the END OF EACH PERIOD. The number of units is multiplied by their unit cost to compute the dollar amount of the ending inventory. pg 305
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INVENTORY FRAUD
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Is a common form of financial statement fraud. pg 307
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ENDING INVENTORY ERROR
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Affects pretax income by the amount of the error and in the next year affects pretax income again by the same amount, but in the opposite direction. pg 307
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LIFO LIQUIDATIONS
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When a LIFO company sells more inventory then it purchases or manufactures, items from the beginning inventory become part of the cost of goods sold. These lower cost items in beginning inventory produce a higher gross profit, higher taxable income, and higher taxes when they are sold. pg 309
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WHAT DO LIFO LIQUIDATIONS CAUSE?
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Increase in tax expense (payments). pg 310
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HOW TO ELIMINATE TEMPORARY LIFO LIQUIDATIONS
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By purchasing additional inventory before year-end. Most companies apply LIFO in this manner. The taxes saved exceed the amount of inventory carrying costs.
pg 311 |
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PURCHASE RETURNS AND ALLOWANCES
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Are a reduction in the cost of purchases associated with unsatisfactory goods. They require a reduction in the cost of inventory purchases and the recording of a cash refund or reduction in liability to the vendor.
pg 312 |
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PURCHASE DISCOUNTS
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A cash discount received for prompt payment of an account. If payment is made within 10 days from the date of purchase, a 2 percent cash discount is granted.
pg 312 |
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RECORDING A "GROSS METHOD" PURCHASE
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After recording the date of purchase, record the date of payment, within the discount period:
1) debit Accounts payable by full dollar amount. 2) credit Inventory by the discount amount (2 percent). 3) credit to Cash the undiscounted amount (98 percent). pg 312 |