Intermediate Accounting 1 - Midterm Exam

The periodic system updates inventory balances at the end of the accounting period, while the perpetual system keeps track of inventory continuously.

Total manufacturing costs include direct materials used, direct labor, and factory overhead. Direct materials purchased are not part of total manufacturing costs.

The relative sales price method allocates joint costs based on the proportion of each product's sales value to the total sales value.

Items that should be included in inventory include goods held for sale, goods in production, and raw materials.

Items that should NOT be included in inventory include goods held for personal use, goods held for resale, and finished goods already shipped to customers.

The inventory account reflects the value of goods a company has on hand at a specific time.

When using a perpetual inventory system, merchandise inventory account is debited for every purchase of merchandise.

The FOB Shipping Point means the buyer takes ownership of the goods at the shipping point, so Kew should record the ₱40,000 invoice cost as an expense because the goods were lost in transit.

Because the goods were returned for full credit, Kew should deduct the ₱70,000 from accounts payable as it is no longer owed to the vendor.

Kew should exclude the ₱500,000 advance payment from the accounts payable balance because this is a prepaid expense representing a future obligation, not a current liability.

The two primary methods for calculating the cost of inventory are FIFO (First-In, First-Out) and LIFO (Last-In, First-Out). FIFO assumes the oldest inventory is sold first, while LIFO assumes the newest inventory is sold first.

The Specific Identification Method is best suited for businesses that deal with unique, high-value items where each item can be easily traced. This is commonly used by jewelers and art dealers.

In the FIFO method, the cost of goods sold is based on the cost of the oldest inventory. This results in a higher profit during periods of inflation.

In the LIFO method, the latest purchased inventory is used to calculate the cost of goods sold. This leads to a lower profit during periods of rising prices.

The Weighted-Average Method calculates the average cost of all available inventory units then uses this average for cost of goods sold calculations. This method smooths out cost fluctuations.

Massive Company's purchases throughout the year have resulted in significant changes in the unit costs. This means that they need to use a method like FIFO or LIFO to determine the cost of goods sold and ending inventory accurately.

Investments classified at fair value through profit or loss (FVTPL) are recognized in the income statement, while those at fair value through other comprehensive income (FVTOCI) are recognized in other comprehensive income (OCI).

When an investment at FVTPL is sold, the gain or loss is recognized in profit or loss. For FVTOCI, the gain or loss is recognized in other comprehensive income (OCI).

The default classification for equity securities is fair value through profit or loss (FVTPL). This means that changes in fair value are recognized in the income statement.

Severe financial difficulty can significantly impact the fair value of an equity investment, potentially leading to a write-down or impairment loss.

When an equity investment is classified at fair value through other comprehensive income (FVTOCI), any unrealized gains or losses are recognized in OCI. If the investment is subsequently sold, the realized gain or loss is recognized in OCI as well.

The higher of the cost of an inventory item or its net realizable value. The net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and disposal.

When using the FIFO method, the oldest inventory items are assumed to be sold first. This leads to the cost of goods sold being based on the earliest purchases, while the ending inventory represents the cost of the most recent purchases.

The amount of any reduction in inventory value to net realizable value is recognized as an expense in the period the write-down occurs. This expense is typically classified as ‘cost of goods sold’ to match the cost of the unsold inventory with the revenue of the related sale.

The estimated selling price of an inventory item, less the estimated costs of completion and disposal. This value reflects the potential revenue that can be generated from the sale of the inventory.

A method used to estimate the cost of goods sold when accurate records are not available. This method uses the historical gross profit margin to estimate the cost of goods sold.

The percentage of revenue remaining after subtracting the cost of goods sold. It reflects the profitability of the company's sales.

The cost incurred to purchase or manufacture inventory items. This includes the direct materials, direct labor, and manufacturing overhead associated with producing the goods.

The physical count of inventory items on hand at a specific point in time. This provides a snapshot of the quantity and value of inventory available.

The cost of transferring inventory from one location to another. This includes shipping costs and other expenses related to moving the goods.

Inventory items returned by customers or suppliers. This reduces the cost of goods sold and adjusts the inventory balance.

The cost of goods available for sale is divided by the number of units available for sale. This method is suitable for businesses with a large number of similar units.

The cost of the last units purchased is used to value the ending inventory. This method is preferred in periods of rising prices.

The cost of the first units purchased is used to value the ending inventory. This method is preferred in periods of falling prices.

Goods held on consignment are not included in the inventory of the consignee (the one holding the goods) because they are not owned by them.

Goods shipped FOB destination are owned by the seller until they reach the buyer. This means that if the goods are shipped on December 31st, they are still included in the seller's inventory.

The cost of inventory must be matched with the revenue it generates. This is done by using inventory costing methods like FIFO or LIFO.

This method uses the average cost of all inventory items to calculate the cost of goods sold and ending inventory.

Inventory should be recorded at the lower of cost and net realizable value. This ensures that inventory is not overvalued.

The amount that inventory can be sold for, less any costs to sell it.