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The aging of accounts receivable includes classifications for accounts that are not due.
The aging of accounts receivable includes classifications for accounts that are not due.
True
The allowance for doubtful accounts can be determined by multiplying the total of each classification by the percentage of loss experienced by the entity.
The allowance for doubtful accounts can be determined by multiplying the total of each classification by the percentage of loss experienced by the entity.
True
The application of the percent of sales approach does not violate the matching principle.
The application of the percent of sales approach does not violate the matching principle.
False
An advantage of the aging method is the simplicity in application for large numbers of accounts.
An advantage of the aging method is the simplicity in application for large numbers of accounts.
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The percent of accounts receivable method estimates the allowance required at the beginning of the period.
The percent of accounts receivable method estimates the allowance required at the beginning of the period.
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The rate used in the percent of sales approach is typically calculated by dividing total sales by bad debt losses.
The rate used in the percent of sales approach is typically calculated by dividing total sales by bad debt losses.
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Aging accounts to determine doubtful accounts provides a scientific computation of the allowance.
Aging accounts to determine doubtful accounts provides a scientific computation of the allowance.
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The aging of accounts is a straightforward process that does not require significant analysis.
The aging of accounts is a straightforward process that does not require significant analysis.
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The percent of sales method directly relates bad debt loss to sales.
The percent of sales method directly relates bad debt loss to sales.
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Inventories only include items that are ready for sale.
Inventories only include items that are ready for sale.
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A manufacturing concern includes finished goods, goods in process, and raw materials.
A manufacturing concern includes finished goods, goods in process, and raw materials.
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All goods included in inventory must be physically located on the premises.
All goods included in inventory must be physically located on the premises.
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The allowance for doubtful accounts may sometimes be excessive or inadequate.
The allowance for doubtful accounts may sometimes be excessive or inadequate.
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Factory or manufacturing supplies are directly related to the final product.
Factory or manufacturing supplies are directly related to the final product.
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Merchandise inventory refers to raw materials in the manufacturing process.
Merchandise inventory refers to raw materials in the manufacturing process.
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A trading concern only sells goods without altering their form.
A trading concern only sells goods without altering their form.
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The cost of purchase includes foreign exchange differences from acquiring inventories involving a foreign currency.
The cost of purchase includes foreign exchange differences from acquiring inventories involving a foreign currency.
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Interest expense is recognized for the difference between the purchase price under normal credit terms and the amount paid when inventories are purchased with deferred settlement terms.
Interest expense is recognized for the difference between the purchase price under normal credit terms and the amount paid when inventories are purchased with deferred settlement terms.
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The cost of conversion of inventories only includes direct labor costs.
The cost of conversion of inventories only includes direct labor costs.
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Fixed production overhead costs vary directly with the volume of production.
Fixed production overhead costs vary directly with the volume of production.
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Normal capacity is the production expected to be achieved under optimal conditions without considering maintenance losses.
Normal capacity is the production expected to be achieved under optimal conditions without considering maintenance losses.
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Unallocated fixed overhead is recognized as an expense in the period it is incurred.
Unallocated fixed overhead is recognized as an expense in the period it is incurred.
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Variable production overhead is allocated based on the expected production capacity.
Variable production overhead is allocated based on the expected production capacity.
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By-products are measured at their production cost and not at net realizable value.
By-products are measured at their production cost and not at net realizable value.
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The phrase 'passing of title' refers to the moment ownership of goods changes.
The phrase 'passing of title' refers to the moment ownership of goods changes.
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Goods included in inventory must always be owned by the entity.
Goods included in inventory must always be owned by the entity.
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Under FOB destination terms, the buyer becomes the owner of the goods as soon as they are shipped.
Under FOB destination terms, the buyer becomes the owner of the goods as soon as they are shipped.
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In an installment contract, goods are included in the seller's inventory until fully paid.
In an installment contract, goods are included in the seller's inventory until fully paid.
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Freight prepaid means that the freight charge is paid by the buyer.
Freight prepaid means that the freight charge is paid by the buyer.
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Goods out on consignment are excluded from the inventory of the consignor.
Goods out on consignment are excluded from the inventory of the consignor.
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Freight collect means that the freight charges will be billed to the seller.
Freight collect means that the freight charges will be billed to the seller.
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The ownership of goods in transit under FOB shipping point is retained by the seller until delivered.
The ownership of goods in transit under FOB shipping point is retained by the seller until delivered.
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Trade discounts are recorded as deductions in financial statements.
Trade discounts are recorded as deductions in financial statements.
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Cash discounts are only provided for payments made after the discount period.
Cash discounts are only provided for payments made after the discount period.
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The gross method records purchases at net amounts to adhere to the matching principle.
The gross method records purchases at net amounts to adhere to the matching principle.
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The net method of recording purchases is more convenient from a bookkeeping standpoint than the gross method.
The net method of recording purchases is more convenient from a bookkeeping standpoint than the gross method.
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Cash discounts are recorded as purchase discounts by the buyer.
Cash discounts are recorded as purchase discounts by the buyer.
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The cost of purchase includes only the purchase price of the inventory.
The cost of purchase includes only the purchase price of the inventory.
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Trade discounts should be added to the cost of purchases when calculating inventory costs.
Trade discounts should be added to the cost of purchases when calculating inventory costs.
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The net method aligns with the theoretical historical cost by representing the cash equivalent price.
The net method aligns with the theoretical historical cost by representing the cash equivalent price.
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Storage costs on finished goods are capitalized.
Storage costs on finished goods are capitalized.
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Directly attributable overhead costs for service providers are included in the cost of inventories.
Directly attributable overhead costs for service providers are included in the cost of inventories.
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The Last In, First Out (LIFO) method is permitted under PAS 2 for measuring cost of inventories.
The Last In, First Out (LIFO) method is permitted under PAS 2 for measuring cost of inventories.
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Abnormal amounts of wasted materials are included in the cost of inventories.
Abnormal amounts of wasted materials are included in the cost of inventories.
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The FIFO method indicates that the goods purchased first are sold first.
The FIFO method indicates that the goods purchased first are sold first.
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Labor costs relating to sales personnel are capitalized in inventory costs.
Labor costs relating to sales personnel are capitalized in inventory costs.
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Under FIFO, the cost of goods sold represents newer prices while the inventory reflects older prices.
Under FIFO, the cost of goods sold represents newer prices while the inventory reflects older prices.
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Costs of designing products for specific customers can be included in inventory costs.
Costs of designing products for specific customers can be included in inventory costs.
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Study Notes
Inventory Methods
- Inventory methods are used to determine the cost of goods sold and the value of ending inventory.
- Two common methods are First-In, First-Out (FIFO) and Weighted-Average.
First-In, First-Out (FIFO)
- Assumes the first units purchased are the first ones sold.
- Ending inventory is valued using the most recent purchase prices.
- Cost of goods sold is based on the older purchase prices.
- Favors higher net income during periods of inflation.
Weighted-Average
- Calculates the average cost of all goods available for sale.
- Average cost is determined by dividing the total cost of goods available for sale by the total number of units available for sale.
- This average cost is applied to both cost of goods sold and ending inventory.
- Considered a better method for tracking when goods are similar and readily interchangeable.
Periodic Inventory System
- Uses physical counts at the end of the accounting period to determine the quantity of goods on hand.
- Cost is multiplied by the quantity to get the value.
- Generally, used when the individual inventory items have small peso investments like groceries, hardware items, etc.
Perpetual Inventory System
- Maintains continuous records of inventory.
- Records of increases and decreases to reflect in stock cards.
- Ideal for situations with high-valued inventory.
- Allows for quick calculations of cost of goods sold.
- A physical count of inventory should be done periodically to verify the perpetual inventory.
Trade Discounts
- Deductions from the list or catalog price, used to arrive at the invoice price.
- Not reflected in accounting records.
Cash Discounts
- Deductions from invoice price, given for prompt payment.
- Recorded as a purchase discount for the buyer and as a sales discount for the seller.
Cost of Inventory
- Purchase price: Import duties, freight, taxes, and other costs associated with acquiring inventory.
- Cost of conversion: Direct labor, variable and fixed production overhead.
Inventory Shortage/Overage
- Differences in physical inventory count and the perpetual inventory system.
- Must be adjusted by recording inventory shortage or inventory overage.
- Shortages are often written off to cost of goods sold expense.
Cost of Goods Sold (COGS)
- Cost of the products or materials sold during a reporting period.
- Determined using different methods like FIFO and Average cost.
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Description
This quiz covers the key inventory methods used in accounting, specifically focusing on First-In, First-Out (FIFO) and Weighted-Average. You'll learn how these methods impact the cost of goods sold and the value of ending inventory during different economic conditions. Test your understanding of when to apply each method effectively.
