Accounting Chapter 5 Flashcards

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Questions and Answers

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory (correct)

Goods shipped FOB destination will be included in the seller's inventory

Goods shipped FOB destination will be included in the buyer's inventory

None of the above

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.

Specific Identification, Weighted Average, First In, First Out (FIFO), Last In, First Out (LIFO) Signup and view all the answers

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 .

Earliest, Income Statement Signup and view all the answers

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.

Purchaser, Seller Signup and view all the answers

What is the formula to compute cost of goods sold?

Merchandise available for sale minus ending inventory Signup and view all the answers

Consigned goods should be included in the consignor's inventory.

True Signup and view all the answers

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 __.

Latest, Income Statement Signup and view all the answers

Which of the costs below would be included in the recorded cost of merchandise inventory?

All of the above Signup and view all the answers

Summarize the weighted average cost flow assumption.

Weighted average assumes that costs flow at an average of the costs available. Signup and view all the answers

What statements below correctly describe the relationship of cost of goods sold and ending inventory?

Cost of goods available for sale must be allocated between cost of goods sold and ending inventory; Cost of goods sold plus ending inventory will equal the total goods available for sale. Signup and view all the answers

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?

The June 1 at $10 and the June 2 at $15 are sold; the July 4 unit remains in ending inventory. Signup and view all the answers

How are inventory costs treated both as assets and expenses?

All of the above Signup and view all the answers

If a company sells two units under LIFO method for the same purchase details, which items are sold first?

The June 2 at $15 and the July 4 at $20 are sold; the June 1 at $10 remains in ending inventory. Signup and view all the answers

What kind of business would use the specific identification method of inventory costing?

A car dealership Signup and view all the answers

Match the cost flow assumption on the left with its definition on the right.

FIFO = Assumes costs flow in the order incurred LIFO = Assumes costs flow in the reverse order incurred Weighted Average = Assumes costs flow at an average of the costs available Specific Identification = Assumes costs flow can be specifically matched with the physical flow of items Signup and view all the answers

All of the following are safeguards for inventory except: preventing risk.

True Signup and view all the answers

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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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.