Questions and Answers
Which of the following statements is correct regarding goods in transit?
The owner of consigned goods is called the ___________ and the one who sells goods for the owner is called the ___________.
Consignor, Consignee
What does the expense recognition principle state?
Inventory costs are expensed as cost of goods sold when inventory is sold.
Recount the methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system.
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The FIFO cost flow assumption assumes that the cost of items purchased ____________ are the costs that will be transferred first to cost of goods sold on the __________.
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If goods are shipped FOB shipping point, then the ____________ is responsible for paying freight charges and the _____________ will not include the merchandise in their inventory.
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What is the formula to compute cost of goods sold?
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Consigned goods should be included in the consignor's inventory.
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The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______.
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Which of the costs below would be included in the recorded cost of merchandise inventory?
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Summarize the weighted average cost flow assumption.
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What statements below correctly describe the relationship of cost of goods sold and ending inventory?
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If a company sells two units under FIFO method for items purchased at June 1 at $10, June 2 at $15, and July 4 at $20, which items are sold first?
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How are inventory costs treated both as assets and expenses?
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If a company sells two units under LIFO method for the same purchase details, which items are sold first?
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What kind of business would use the specific identification method of inventory costing?
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Match the cost flow assumption on the left with its definition on the right.
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All of the following are safeguards for inventory except: preventing risk.
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Study Notes
Goods in Transit
- Goods shipped FOB shipping point are included in the buyer's inventory.
Consignment
- The owner of consigned goods is called the consignor.
- The individual who sells goods for the owner is called the consignee.
Inventory Cost Recognition
- The expense recognition principle states inventory costs are expensed as cost of goods sold upon sale.
Cost Assignment Methods
- Specific Identification
- Weighted Average
- First In, First Out (FIFO)
- Last In, First Out (LIFO)
FIFO Cost Flow Assumption
- The earliest purchased costs are transferred first to cost of goods sold and reported on the income statement.
Ownership of Goods in Transit
- If goods are shipped FOB shipping point, the purchaser is responsible for freight charges while the seller does not include the merchandise in their inventory.
Cost of Goods Sold Formula
- Cost of goods sold is calculated as merchandise available for sale minus ending inventory.
Consigned Goods
- Consigned goods should remain in the consignor's inventory.
LIFO Cost Flow Assumption
- The latest purchased costs are the first to be transferred to cost of goods sold, appearing on the income statement.
Recorded Cost of Merchandise Inventory
- Include invoice costs, shipping costs, and insurance costs in the recorded cost of merchandise inventory.
Weighted Average Cost Flow Assumption
- This method assumes costs flow at the average of the available costs.
Relationship of COGS and Ending Inventory
- Cost of goods available for sale is allocated between cost of goods sold and ending inventory.
- The sum of cost of goods sold and ending inventory equals total goods available for sale.
FIFO Selling Sequence
- Under FIFO, the June 1 unit at $10 and the June 2 unit at $15 are sold first; the July 4 unit at $20 remains in ending inventory.
Inventory Costs as Assets and Expenses
- Sold inventory items are part of cost of goods sold on the income statement.
- Inventory costs are treated as expenses upon sale.
- Unsold inventory items at period-end are part of Merchandise Inventory on the balance sheet.
LIFO Selling Sequence
- For LIFO, the June 2 unit at $15 and the July 4 unit at $20 are sold first; the June 1 unit at $10 remains in ending inventory.
Specific Identification Method Usage
- Businesses like car dealerships typically utilize the specific identification method of inventory costing.
Cost Flow Assumptions Definitions
- FIFO: Costs flow in order incurred.
- LIFO: Costs flow in reverse order incurred.
- Weighted Average: Costs flow at an average of available costs.
- Specific Identification: Costs flow matched specifically with physical item movement.
Inventory Safeguards
- "Preventing risk" is not a recognized safeguard for inventory.
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Description
Test your knowledge with these flashcards on Accounting Chapter 5. Focus on key concepts such as goods in transit, consignments, and inventory principles. Perfect for reinforcing your understanding of essential accounting terms.