Accounting Inventory and COGS Overview
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Questions and Answers

What is inventory?

Includes items a company intends for sale to customers in the ordinary course of business. Inventory also includes items that are not yet finished products. Generally reported as a current asset in the balance sheet.

Is inventory a current or long-term asset?

False

What is cost of goods sold (COGS)?

Cost of goods sold is the carrying value of goods sold during a particular period, reported in the income statement.

What is the structure of a multiple-step income statement?

<p>A multiple-step income statement reports multiple levels of profitability, including gross profit, operating income, and net income.</p> Signup and view all the answers

What is the characteristic of operating income?

<p>Operating income measures how much of your business's profit comes from business operations, calculated as gross income minus operating expenses.</p> Signup and view all the answers

What is the relation of inventory and COGS?

<p>Beginning Inventory + Purchases = COGS + Ending Inventory.</p> Signup and view all the answers

What is FIFO?

<p>First In, First Out (FIFO) is an accounting method in which assets purchased or acquired first are disposed of first.</p> Signup and view all the answers

What is LIFO?

<p>Last In, First Out (LIFO) is a method used to account for inventory. Under LIFO, the costs of the most recent products purchased or produced are the first to be expensed.</p> Signup and view all the answers

When cost is rising, which method results in the highest COGS?

<p>LIFO</p> Signup and view all the answers

Which method results in the highest balance of ending inventory?

<p>FIFO</p> Signup and view all the answers

What is the lower of cost and net realizable value method?

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What is accumulated depreciation?

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What is Book Value of a PPE asset?

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Which kind of subsequent expenditure after the purchase of a PPE asset should be capitalized?

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How to determine the gain or loss of the sale of a PPE asset?

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What is intangible asset amortization?

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How should a company recognize research and development (R&D) costs?

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What kind of account is COGS?

<p>Expense in the Income Statement.</p> Signup and view all the answers

Study Notes

Inventory Overview

  • Inventory includes items for sale and unfinished products.
  • Reported as a current asset on the balance sheet.

Inventory Classification

  • Inventory is classified as a current asset.

Cost of Goods Sold (COGS)

  • COGS represents the carrying value of goods sold during a specific period.
  • Reported in the income statement.

Multiple-Step Income Statement

  • Structure includes multiple profitability levels:
    • Gross profit = Net revenues - COGS.
    • Operating income = Gross profit - Operating expenses.
    • Net income = Total revenues - Total expenses.

Operating Income Characteristics

  • Indicates profit derived from business operations.
  • Calculated as gross income minus operating expenses.

Operating vs. Non-Operating Income

  • Operating income includes revenues and expenses directly related to primary business activities.
  • Non-operating income includes revenues and expenses not related to core operations.

Inventory and COGS Relationship

  • COGS is determined using the equation:
    • Beginning Inventory + Purchases = COGS + Ending Inventory.

Inventory Valuation Methods

  • FIFO: First In, First Out method where oldest inventory is sold first.
  • LIFO: Last In, First Out method where most recent inventory is sold first. Used only in the U.S.
  • Weighted Average Cost: Averages the cost of all inventory items.
  • Specific Identification: Tracks the actual cost of each item sold.

COGS Calculations Under Different Methods

  • COGS is highest using the LIFO method when costs are rising.
  • FIFO results in the highest balance of ending inventory.

Popularity of LIFO

  • LIFO is favored in certain economic environments due to tax advantages during inflation.

Inventory Systems

  • Perpetual Inventory System: Continuously updates inventory records.
  • Periodic Inventory System: Updates inventory records at regular intervals.

Journal Entries for Perpetual Systems

  • Two journal entries required for inventory sales: one for purchasing inventory and another for sales.

Lower of Cost and Net Realizable Value

  • Method used for assessing inventory value, ensuring inventory is not overstated on the balance sheet.

Property, Plant, and Equipment (PPE)

  • PPE includes land, buildings, and equipment, recorded as capitalized costs in the balance sheet.

Natural Resources Characteristics

  • Unique features including depletion and consumption characteristics.

Accumulated Depreciation

  • Represents the total depreciation expense allocated to an asset over time. It is a contra asset account.

Book Value of PPE

  • Book value indicates the value of a PPE asset after accounting for depreciation.
  • Residual (salvage) value is the estimated value at the end of a PPE asset's useful life.

Subsequent Expenditure Treatment

  • Capitalized costs enhance the value of PPE and are added to the asset's book value.
  • Expenses are costs incurred that do not extend the asset's useful life.

Depreciation Expense Calculation

  • Calculated through various methods:
    • Straight-line method: Equal expense over useful life.
    • Declining balance method: Accelerated depreciation based on a percentage of book value.
    • Units of activity method: Based on actual usage.

Gain or Loss on Sale of PPE

  • Determined by comparing the sale proceeds to the book value of the asset.

Intangible Assets

  • Categories include copyrights, patents, trademarks, franchises, and goodwill, each with specific legal definitions and implications.

Amortization of Intangible Assets

  • Intangible assets are amortized over their useful life, reflecting their consumption and reducing the asset's value.

Research and Development Costs

  • Typically expensed as incurred, as per accounting standards, rather than capitalized.

COGS Classification

  • Recognized as an expense in the Income Statement, reflecting the cost associated with goods sold during a period.

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Description

This quiz covers essential concepts related to inventory classification, cost of goods sold (COGS), and the multiple-step income statement. Test your understanding of how inventory and COGS impact financial statements and the distinction between operating and non-operating income. Perfect for accounting students!

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