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Which of the following are methods of estimating doubtful accounts?
Which of the following are methods of estimating doubtful accounts?
The aging of accounts receivable involves analyzing accounts that are not due or past due.
The aging of accounts receivable involves analyzing accounts that are not due or past due.
True
The major argument for using the aging method is its accuracy and scientific computation of the allowance for doubtful accounts.
The major argument for using the aging method is its accuracy and scientific computation of the allowance for doubtful accounts.
True
A major criticism of the aging method is that it violates the matching process.
A major criticism of the aging method is that it violates the matching process.
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The percentage of accounts receivable method involves multiplying a certain rate by the open accounts at the end of the period to determine the required allowance balance.
The percentage of accounts receivable method involves multiplying a certain rate by the open accounts at the end of the period to determine the required allowance balance.
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The percentage of accounts receivable method directly matches bad debt losses to the sales revenue.
The percentage of accounts receivable method directly matches bad debt losses to the sales revenue.
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The percentage of sales method involves multiplying the amount of sales for the year by a certain rate to determine the doubtful accounts expense.
The percentage of sales method involves multiplying the amount of sales for the year by a certain rate to determine the doubtful accounts expense.
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A benefit of the percentage of sales method is its direct alignment with sales revenue, providing a better matching of costs and revenues.
A benefit of the percentage of sales method is its direct alignment with sales revenue, providing a better matching of costs and revenues.
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A criticism of the percentage of sales method is that it may not accurately reflect the estimated realizable value of the accounts receivable.
A criticism of the percentage of sales method is that it may not accurately reflect the estimated realizable value of the accounts receivable.
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Inventories are assets held for sale in the ordinary course of business, used in the production process, or held as materials or supplies.
Inventories are assets held for sale in the ordinary course of business, used in the production process, or held as materials or supplies.
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The phrase "passing of title" indicates the point in time when legal ownership of the goods changes hands.
The phrase "passing of title" indicates the point in time when legal ownership of the goods changes hands.
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Consignment goods are included in both the consignor's and consignee's inventory.
Consignment goods are included in both the consignor's and consignee's inventory.
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The cost of conversion related to inventories includes costs directly linked to manufacturing units, such as direct labor.
The cost of conversion related to inventories includes costs directly linked to manufacturing units, such as direct labor.
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Directly attributable cost refers to costs incurred in bringing the inventory to its current location and condition.
Directly attributable cost refers to costs incurred in bringing the inventory to its current location and condition.
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The FIFO method is generally favored during periods of inflation because it results in a higher net income compared to other inventory cost methods.
The FIFO method is generally favored during periods of inflation because it results in a higher net income compared to other inventory cost methods.
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The weighted average method calculates the cost of goods sold by using a weighted average of all inventory units purchased during the period.
The weighted average method calculates the cost of goods sold by using a weighted average of all inventory units purchased during the period.
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The weighted average method is more suitable for use in a period of deflation because it lowers the cost of goods sold, leading to higher net income.
The weighted average method is more suitable for use in a period of deflation because it lowers the cost of goods sold, leading to higher net income.
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Study Notes
Inventory Costing Methods
- First-In, First-Out (FIFO): Assumes the first items purchased are the first ones sold. Remaining inventory is valued at the most recent purchase prices.
- Weighted Average: Calculates the average cost of all inventory items available for sale during the period. This average cost is then multiplied by the number of units on hand to determine the ending inventory value.
- Last-In, First-Out (LIFO): Assumes the last items purchased are the first ones sold. This method is not allowed under generally accepted accounting principles (GAAP) in many countries.
Cost of Inventory
- Cost of Purchase: Includes purchase price, import duties, and any other costs directly related to acquisition.
- Cost of Conversion: Includes direct labor and manufacturing overhead costs. Manufacturing overhead can be fixed or variable, directly or indirectly attributed to production.
- Cost of Inventory Components: Direct materials, direct labor, and factory overhead are all factors in determining the appropriate cost for an inventory component.
- Determining Costs of Inventory: Cost may vary based on circumstances and if goods are in process. Costs should be allocated using a rational and consistent basis, especially if items are not readily identifiable.
- Inventory Shortage or Overage: Discrepancies between physical count and recorded inventory require adjustments, which often relate to normal shrinkage/breakage.
Accounting for Inventory
- Periodic System: Physical counting of goods at the end of an accounting period to determine quantities.
- Perpetual System: Maintains records of inventory movements (inflows and outflows) in real time using stock cards or similar.
Cost of Goods Sold (COGS)
- Gross Method: Records purchases and accounts payable at their gross invoice amounts.
- Net Method: Records purchases and accounts payable at their net invoice amounts (after deducting any discounts).
- Trade Discounts: Reductions from the list price, normally not recorded in accounting.
- Cash Discounts: Reductions offered for prompt payment, recorded as a purchase or sales discount.
- Inventory Cost Flow: Different methods exist (FIFO, LIFO, Weighted-Average) and affect cost of goods sold and ending inventory values.
Goods Includible in Inventory
- Legal Test: Ownership of a good is assessed using a legal definition. In general, goods with title to the entity are included in inventory.
- FOB Destination: Ownership of goods transfers to the buyer once the goods arrive at the destination.
- FOB Shipping Point: Ownership of goods transfers to the buyer once the goods are shipped.
- Goods in Transit: Goods are owned by the seller if shipped FOB destination or by the buyer if shipped FOB shipping point. Goods on consignment are not included in the inventory of the consignee.
Consigned Goods
- Consignment: A method to market goods where the owner (consignor) transfers possession of goods to an agent (consignee) who sells them. Consigned goods are included in the consignor's inventory but excluded from the consignee's inventory.
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Description
Test your knowledge on the different inventory costing methods such as FIFO, LIFO, and Weighted Average. This quiz also covers the cost components related to inventory including purchase and conversion costs. Perfect for accounting students and professionals!
