Chapter #6 - Reporting and Analyzing Inventory Flash Cards

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Title: Chapter #6 - Reporting and Analyzing Inventory
Description: Reimers - A 201 - Financial Accounting
Number of Cards: 16
Save Count: 0
Author: cja-Friends
Created: 2008-07-02
Tags: controls costflowassumptions goods lowerofcostormarket risks sold valuinginventory
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    • Question
    • Answer
    • Side 3
    • Describe the specific identication cost flow method.
    • Specific identification – the inventory cost flow method in which the actual cost of the specific goods sold is recorded as cost of goods sold.
    • Describe the weighted average cost cost flow method.
    • Weighted average cost – the inventory cost flow method in which the weighted average cost of the goods available for sale is used to calculate cost of goods and the ending inventory.
    • Explain "First-in, First-out".
    • First-in, first-out (FIFO) method – the inventory cost flow method that assumes the first items purchased are the first items sold.
    • How will a year-end purchase affect reported profits if a business uses FIFO?
    • With FIFO, the extra purchase will be absorbed into the ending inventory cost, with no effect on gross profit or net income.
    • What is the "Last-in, first-out" method?
    • Last-in, first-out (LIFO) method – the inventory cost flow method that assumes the last items purchased are the first items sold.
    • What happens to profits if the price of inventory rises under the LIFO method.
    • Rising prices under the LIFO method result in lower income
    • How will a year-end purchase affect reported profits if a business uses LIFO?
    • With LIFO, the more recent purchase at higher prices is absorbed into cost of goods sold, replacing an earlier purchase at lower cost. With LIFO, an end-of-the year purchase will decrease gross profit and the net income for the year.
    • Name some factors that might influence a firm’s choice of inventory cost flows assumptions:
    • a. Compatibility with similar companies
      b. Maximize tax savings and cash flows.
      c. Maximize net income.
    • What is the "lower of cost or market" rule?
    • With the lower-of-cost-or-market rule - GAAP requires companies to compare the cost of their inventory at the end of the period with the market value of that inventory, based on either individual items or total inventory. The company must use the lower of either the cost or the market value
    • What is the market value?
    • The market value used is the replacement cost – the cost to buy similar items in inventory from the supplier to replace the inventory.
    • What is the formula for the inventory turnover ratio?
    • The inventory turnover ratio is defined as cost of goods sold divided by average inventory.
    • What is the Specific identification cost flow method?
    • Specific identification is the inventory cost flow method in which the actual cost of the specific goods sold is recorded as cost of goods sold.
    • How would you calculate inventory under the Weighted average cost method?
    • Weighted average cost is the inventory cost flow method in which the weighted average cost of the goods available for sale is used to calculate cost of goods and the ending inventory.
    • What is the First-in, first-out (FIFO) cost flow assumption?
    • First-in, first-out (FIFO) method is the inventory cost flow method that assumes the first items purchased are the first items sold.
    • How will a year-end purchase affect reported profits if a business uses FIFO?
    • With FIFO, the extra purchase will be absorbed into the ending inventory cost, with no effect on gross profit or net income.
    • What is the cost flow assumption under the Last-in, last-out (LIFO) cost method?
    • Last-in, first-out (LIFO) method – the inventory cost flow method that assumes the last items purchased are the first items sold.