Accounting 211 Chapter 5 Flashcards

Study Notes

Merchandise Inventory

Merchandise inventory includes all goods owned by a company for sale, irrespective of their location.
Special attention is needed for goods in transit, goods on consignment, and damaged or obsolete items.

Goods on Consignment

Goods consigned are those shipped by the owner (Consigner) to another party (Consignee) for sale.

Damaged or Obsolete Goods

Damaged or obsolete items are excluded from inventory if unsellable.
If they can be sold at reduced prices, include them at a conservative estimate of their net realizable value.

Inventory Costing Methods

FIFO (First-in, First-out): Assumes costs flow in the order incurred. Earlier purchases are sold first, affecting cost of goods sold and ending inventory.
LIFO (Last-in, First-out): Assumes costs flow in reverse. Most recent purchases are sold first, impacting cost of goods sold and ending inventory.
Weighted Average: Costs are averaged across available inventory, reflecting overall cost for goods sold.
Specific Identification: Identifies each item with a specific purchase and invoice for accurate tracking.

Financial Statement Effects of Costing Methods

FIFO results in lower cost of goods sold, leading to higher gross profit and net income.
LIFO results in higher cost of goods sold, leading to lower gross profit and net income.
Weighted average produces results between FIFO and LIFO.
Specific identification results vary based on which units are sold.
Declining cost scenarios can invert advantages of FIFO and LIFO.

Lower of Cost or Market (LCM)

Merchandise is reported on the balance sheet at the lower of its cost or market value.
LCM can be applied individually to items, to major categories, or to the inventory as a whole.
Adjustments to inventory are made by debiting cost of goods sold and crediting merchandise inventory if adjustments to market value are needed.

Financial Statement Effects of Inventory Errors

Understated ending inventory leads to overstated cost of goods sold and understated net income in year 1; opposite occurs in year 2.
Overstated ending inventory leads to understated cost of goods sold and overstated net income in year 1; opposite occurs in year 2.

LCM Calculation

Calculate total cost and total market value, applying the lower of the two to determine inventory valuation.

Cost of Goods Sold (COGS) Calculation

COGS is calculated as beginning inventory + net purchases - ending inventory.

Inventory Turnover

Inventory turnover is measured by cost of goods sold divided by average inventory, reflecting efficiency in inventory management.

Day's Sales in Inventory

Calculated as ending inventory divided by cost of goods sold, multiplied by 365, indicating how long inventory is held before sale.

Description

Test your knowledge of key concepts from Accounting 211, Chapter 5. This quiz focuses on essential definitions and terms related to merchandise inventory, including special considerations like goods in transit and consignment. Perfect for mastering inventory accounting principles!