Final Exam Notes

Final Exam Notes - Ch. 7 Notes Types of Inventory raw...

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Ch. 7 Notes Types of Inventory – raw materials (e.g. steel, plastic), work in process (goods in the process of being manufactured), and finished goods (ready for sale merchandise) Consignment inventory – goods a company is holding on behalf of the goods’ owner Goods in transit – inventory items being transported Cost of Goods Sold Equation (COGS) = BI (Beginning Inventory) +P (Purchases) - EI (Ending Inventory) INVENTORY COSTING METHODS Specific Identification – the cost of each item sold is individually identified and recorded as COGS FIFO (First in, First out) – the cost for the first goods purchased are the cost of the first goods sold LIFO (Last in, First out) – the cost of the last goods purchased are the cost of the first goods sold Weighted Average – the weighted average unit cost of goods available for sale for both cost of goods sold and ending inventory; COGS/Units Available for Sale ** When costs are rising , FIFO leads to a higher inventory value (balance sheet stronger ) and a lower cost of goods sold (higher gross profit, looks more profitable); higher income tax expense** **When costs are falling, LIFO leads to a higher inventory value (balance sheet stronger ) and a lower cost of goods sold (higher gross profit, looks more profitable); higher income tax expense** Companies can choose their inventory costing method, as long as it is used consistently over time. They can even switch between methods for different product lines. International accounting rules do not allow LIFO at all. LIFO provides a better matching of expenses with revenues U.S. companies using LIFO are required to report what their inventory balance would have been had they used FIFO Lower of Cost or Market (LCM) – the valuation rule that requires the inventory account to be reduced when the value of the inventory falls to an amount less than its cost Inventory Write-Down (-A) -15,000 Inventory (+E) -15,000 Inventory turnover analysis – the process of buying and selling inventory; COGS/Average Inventory; higher ratio means faster turnover Days to Sell – a measure of the average number of days from the time inventory is bought to the time it is sold; 365/Inventory Turnover Ratio; higher number means a longer time to sell Often the company with the lower gross profit percentage has a faster inventory turnover. APPLYING FIFO AND LIFO TO A PERPETUAL INVENTORY SYSTEM FIFO calculations don’t differ between periodic and perpetual inventory systems Only LIFO and weighted average calculations differ between periodic and perpetual
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Ch. 8 Notes Part 1 PROS AND CONS OF EXTENDING CREDIT Pros Generates additional sales and meets the terms offered by competitors Cons Increases bad debt cost, increases wages to manage receivables, and delayed receipt of cash Bad Debt Expense Used to match incomes according to the matching principle Bad Debt Expense (+E) 100,000 Allowance for Doubtful Accounts (-A) 100,000
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Final Exam Notes - Ch. 7 Notes Types of Inventory raw...

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