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Questions and Answers
What is the key difference between the perpetual and periodic inventory systems in terms of recording cost of goods sold (COGS)?
What is the key difference between the perpetual and periodic inventory systems in terms of recording cost of goods sold (COGS)?
- Both systems record COGS at the time of purchase.
- COGS is only recorded when inventory is physically counted.
- COGS is recorded at the time of sale in the perpetual system. (correct)
- COGS is recorded periodically based on inventory counts in the periodic system. (correct)
If Fesmire Company found a $500 discrepancy in its ending inventory, what could this signify in terms of COGS calculation?
If Fesmire Company found a $500 discrepancy in its ending inventory, what could this signify in terms of COGS calculation?
- Physical inventory was not counted accurately, affecting both systems. (correct)
- Inventory values were incorrectly assigned leading to inventory misstatements. (correct)
- COGS may be understated due to missing sales entries.
- COGS may be overstated due to incorrect inventory counts.
If the beginning inventory is $250 and additional purchases total $4,000, how is the gross profit affected if ending inventory incorrectly reflects $600 instead of the correct $500?
If the beginning inventory is $250 and additional purchases total $4,000, how is the gross profit affected if ending inventory incorrectly reflects $600 instead of the correct $500?
- Gross profit will remain unchanged.
- Gross profit will decrease by $100. (correct)
- Gross profit will increase but is unknowable without sales data.
- Gross profit will increase by $100.
Why is it essential to verify whether the physical inventory count matches the recorded ending inventory?
Why is it essential to verify whether the physical inventory count matches the recorded ending inventory?
Which scenario could lead to an overstatement of ending inventory and an understatement of COGS?
Which scenario could lead to an overstatement of ending inventory and an understatement of COGS?
What is the effect of understating ending inventory on net income in the year the error occurs?
What is the effect of understating ending inventory on net income in the year the error occurs?
How does an understatement of beginning inventory affect retained earnings?
How does an understatement of beginning inventory affect retained earnings?
If a company overstates its ending inventory, what is the immediate effect on cost of goods sold (COGS)?
If a company overstates its ending inventory, what is the immediate effect on cost of goods sold (COGS)?
What is the long-term effect of inventory errors on net income across multiple reporting periods?
What is the long-term effect of inventory errors on net income across multiple reporting periods?
How is inventory classified in the statement of financial position?
How is inventory classified in the statement of financial position?
What is the effect of misstatements on the income statement for the year an error is made?
What is the effect of misstatements on the income statement for the year an error is made?
If purchases are misstated and that error does not affect COGS, what could potentially happen to net income?
If purchases are misstated and that error does not affect COGS, what could potentially happen to net income?
How does an overstatement of ending inventory affect net income?
How does an overstatement of ending inventory affect net income?
What is the immediate effect of an inventory error that overstated purchases for the period?
What is the immediate effect of an inventory error that overstated purchases for the period?
In the case of an inventory error that understates ending inventory, what is the likely impact on the balance sheet?
In the case of an inventory error that understates ending inventory, what is the likely impact on the balance sheet?
If the cost of goods sold is overstated due to an inventory misstatement, what would be reflected on the income statement?
If the cost of goods sold is overstated due to an inventory misstatement, what would be reflected on the income statement?
Which of the following scenarios best describes the effect of inventory errors during a period of rising prices?
Which of the following scenarios best describes the effect of inventory errors during a period of rising prices?
What happens to the financial statements if an inventory error remains undetected?
What happens to the financial statements if an inventory error remains undetected?
How would a misstatement in ending inventory due to an inventory error generally affect investor perception?
How would a misstatement in ending inventory due to an inventory error generally affect investor perception?
Which method of inventory valuation could minimize the effect of inventory misstatements on financial performance?
Which method of inventory valuation could minimize the effect of inventory misstatements on financial performance?
What is a likely consequence of an inventory overstatement when using the FIFO method?
What is a likely consequence of an inventory overstatement when using the FIFO method?
Which financial statement is most directly affected by inventory errors?
Which financial statement is most directly affected by inventory errors?
Flashcards
Ending Inventory Misstatement
Ending Inventory Misstatement
An error in the ending inventory balance that impacts both the current year's and next year's income statement, but ultimately balances out over two years.
Ending Inventory Error and COGS
Ending Inventory Error and COGS
An error in the ending inventory balance will cause a corresponding error in the cost of goods sold (COGS) calculation.
Beginning Inventory Error and COGS
Beginning Inventory Error and COGS
An error in the beginning inventory balance will affect the cost of goods sold (COGS) in the current period.
Misstated Purchases and Inventory
Misstated Purchases and Inventory
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Beginning Inventory Error and Income Statement
Beginning Inventory Error and Income Statement
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Inventory Error and Retained Earnings
Inventory Error and Retained Earnings
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Inventory Classification
Inventory Classification
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Perpetual Inventory System
Perpetual Inventory System
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Periodic Inventory System
Periodic Inventory System
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Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS)
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Ending Inventory
Ending Inventory
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Inventory Cost Flow Assumption
Inventory Cost Flow Assumption
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FIFO (First-In, First-Out)
FIFO (First-In, First-Out)
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Average-Cost Method
Average-Cost Method
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What happens if ending inventory is understated?
What happens if ending inventory is understated?
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What happens if ending inventory is overstated?
What happens if ending inventory is overstated?
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How does average-cost method affect net income during rising prices?
How does average-cost method affect net income during rising prices?
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How does FIFO method affect net income during rising prices?
How does FIFO method affect net income during rising prices?
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What is the impact of rising prices on FIFO?
What is the impact of rising prices on FIFO?
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What is the impact of rising prices on average-cost method?
What is the impact of rising prices on average-cost method?
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Study Notes
Intermediate Accounting - Chapter 8
- This chapter covers the valuation of inventories using a cost-basis approach.
- Learning objectives include describing inventory classifications and systems, identifying inventory goods and costs, comparing cost flow assumptions for inventories, and determining the effects of inventory errors on financial statements.
- Inventories are assets held for sale in the ordinary course of business or for use in the production of goods to be sold.
- Merchandising companies have one classification of inventory, while manufacturing companies classify inventory into raw materials, work in process, and finished goods.
- Inventory cost flow involves beginning inventory, cost of goods purchased, cost of goods available for sale, cost of goods sold, and ending inventory.
- Two inventory systems exist: perpetual and periodic. The perpetual system continuously updates inventory changes, while the periodic system updates records only periodically.
- Freight costs are classified as either freight-in (buyer's cost, treated as inventory) or freight-out (seller's cost, treated as an operating expense).
- Purchase discounts are reductions in selling prices granted to customers. IASB mandates recording them as a reduction from the inventory cost.
- Cost flow assumptions—specific identification, first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted-average cost—are not always aligned with physical flow of goods but must be consistent. LIFO is not permitted under IFRS but is allowed under GAAP and for tax purposes in some jurisdictions.
- Inventory control requires periodic verification of inventory records by actual count, weight, or measurement. The verification should occur near the end of the fiscal year to ensure the records are correctly reflected in annual reports.
- Inventory turnover measures the average number of times inventory is sold during a period, measuring inventory liquidity. Inventory turnover in days is calculated by dividing 365 by the inventory turnover ratio.
- Working capital refers to a company's ability to meet its obligations and unexpected needs for cash, calculated by subtracting current liabilities from current assets. A current ratio is also often used as a measure of liquidity.
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Description
This quiz covers Chapter 8 of Intermediate Accounting, focusing on the valuation of inventories through a cost-basis approach. You will learn about inventory classifications, systems, cost flow assumptions, and the impact of inventory errors on financial statements. Dive into the essentials of inventory management for merchandising and manufacturing companies.
