Chapter 5 Review. Reporting and Analyzing Inventories

Financial Accounting

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Key Terms Chapter 5 Goods on Consignment Goods on consignment are goods shipped by the owner, called the Consignor , to another party, the Consignee . A consignee sells goods for the owner. The consignor continues to own the consigned goods and reports them in its inventory. 1
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Key Terms Chapter 5 2
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Key Terms Chapter 5 I.Inventory Costing Under a Perpetual System A. Inventory Cost Flow Assumptions (1) FIFO assumes costs flow in the order incurred. (2) LIFO assumes costs flow in the reverse order incurred. (3) Weighted average assumes costs flow at an average of the costs available Point: The perpetual inventory system is now the most dominant system for U.S. businesses. 3
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Key Terms Chapter 5 1. First-In, First-Out The First-in, first-out (FIFO) method of assigning costs to both inventory and cost of goods sold assumes that inventory items are sold in the order acquired. When sales occur, the costs of the earliest units acquired are charged to cost of goods sold. This leaves the costs from the most recent purchases in ending inventory. Point: Under FIFO, a unit sold is assigned the earliest (oldest) cost from inventory. This leaves the most recent costs in ending inventory. 4
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Key Terms Chapter 5 2. Last-In, First-Out The Last-in, first-out (LIFO) method of assigning costs assumes that the most recent purchases are sold first. These more recent costs are charged to the goods sold, and the costs of the earliest purchases are assigned to inventory. As with other methods, LIFO is acceptable even when the physical flow of goods does not follow a last-in, first-out pattern. One appeal of LIFO is that by assigning costs from the most recent purchases to cost of goods sold, LIFO comes closest to matching current costs of goods sold with revenues (compared to FIFO or weighted average). 5
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Key Terms Chapter 5 3. Weighted Average The Weighted average (also called Average cost ) method of assigning cost requires that we use the weighted average cost per unit of inventory at the time of each sale. Weighted average cost per unit at the time of each sale equals the cost of goods available for sale divided by the units available. 6
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Chapter 5 Point: Under weighted average, a unit sold is assigned the average cost of all items currently available for sale at the date of each sale. Advances in technology have greatly reduced the cost of a perpetual inventory system. Many companies are now asking whether they can afford not to have a perpetual inventory system because timely access to inventory information is a competitive advantage and it can help reduce the level of inventory, which reduces costs. 7
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Chapter 5 Review. - Key Terms Chapter 5 Goods on Consignment Goods on consignment are goods shipped by the owner called the Consignor to another

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