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FSU - ACG 2021 - ACG Study Guide 3 - Study Guide

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FSU - ACG 2021 - ACG Study Guide 3 - Study Guide

School: Florida State University
Department: Accounting
Course: Financial Accounting
Professor: Ronald Pierno
Term: Summer 2015
Tags: Accounting, financial accounting, paterson, FSU, and ACG
Name: ACG Study Guide 3
Description: Chapters 6,8,9
Uploaded: 03/25/2018
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background image Chapter 6: Reporting and Analyzing Inventory Learning Objectives: o Determine how to classify inventory and inventory quantities.  o Apply the inventory cost flow methods under a periodic inventory system.  o Explain the financial statement and tax effects of each of the inventory cost flow  assumptions.  o Explain the lower­of­cost­or­market basis of accounting for inventories.  o Compute and interpret the inventory turnover.  o Describe the LIFO reserve and explain its importance for comparing results of  different companies  o Apply inventory cost flow to perpetual inventory records (Appendix) o Indicate the effects of inventory errors on the financial statements (App.)         Determining Inventory Quantities o Physical Inventory taken for two reasons ­ Perpetual system: 1. Check accuracy of inventory records. 2. Determine amount of inventory lost due to wasted raw material,  shoplifting, or employee theft. ­ Periodic System: 1. Determine inventory at hand 2. Determine the cost of goods sold for the period.        Classifying and Determining Inventory  o  Merchandising Company (one classification):  ­    Merchandise Inventory  o  Manufacturing Company (three classification):  ­    Raw materials ­    Work in Progress ­    Finished Goods.
background image        Determining Inventory Quantities o Determining Ownership of Goods  ­ Goods in Transit Purchase goods not yet received. Sold goods not yet delivered. FOB Destination & FOB Shipping Point ­ Consigned Goods A consignee(antique shop) holds the goods of other parties called 
consignors (person who brought it in) and the consignee(antique 
store) tries to sell the goods for the consignor(person who brought 
it in) for a fee, but without taking ownership of the goods. 
       Inventory Costing  o Inventory is accounted for at a cost. ­ Cost includes all expenditures necessary to acquire goods and place them  in a condition ready for sale. ­ Unit cost are applied to quantities to determine the total cost of the  inventory and the cost of goods sold using the following costing methods Specific identification  First in, first­out (FIFO).        Last in, first­out (LIFO).       Cost Flow Assumptions Average­cost                         o Specific Identification  ­ Actual physical flow costing method in which items still in inventory are  specifically costed to arrive at the total cost of the ending inventory. Practice is relatively rare Most companies make assumptions (cost flow assumptions) about 
which units were sold.
o Cost Flow Assumption 2
background image ­ Does not need to be consistent with the physical movement of the goods. o Cost of Goods Sold formula:  ­ beginning inventory + purchases – ending inventory = cost of goods sold        Cost Flow Assumptions: o First­In, First­Out (FIFO) ­ The cost of the earliest goods purchased are the first to be recognized in  determining costs of goods sold ­ Often parallels actual physical flow of merchandise ­ Companies determine the cost of the ending inventory by taking the unit  cost of the most recent purchase and working backwards until all units of  inventory have been costed. ­ Doesn’t matter if its periodic or perpetual, you get the same answer!! ­ During inflation  low cost of goods sold, high stockholders equity,  etc. o Last­In, First­Out (LIFO) ­ Costs of the latest goods purchased are the first to be recognized in  determining cost of goods sold (low cost of goods sold). ­ Seldom coincides with actual physical flow of merchandise. ­ Exceptions include goods stowed in piles, such as coal or hay. ­ Periodic: don’t care when sale happens, you still pretend you sold one  (end of year, sell first) ­ Perpetual: (transaction on the day of the sale) adjusted for inflation ­ Lowest income taxes o Average­Cost ­ Allocates cost of goods available for sale on the basis of weighted­average unit cost incurre ­ d 3
background image ­ Applies weighted­average unit cost to the units on hand to determine cost  of the ending inventory. ­ An in between of FIFO and LIFO, just periodic.        Inventory Costing o Using Cost Flow Methods Consistently ­ Method should be used consistently, enhances comparability  ­ Although consistency is preferred, a company may change its inventory  costing method o Lower­of­Cost­or­Market ­ When the value of inventory is lower than its cost. ­ Companies can “write down” the inventory to its market value in the  period in which the price decline occurs ­ Market value = Replacement cost ­ Example of conservatism. ­ Lowers equity        Analysis of Inventory o Inventory management is a critical task 1. High inventory levels:  storage costs, interest costs (on funds tied up in  inventory), and costs associated with the obsolescence of technical goods  or shift in fashion 2. Low inventory levels:  may lead to lost sales. o Inventory Turnover Ratio (ITR) ­ ITR= cost of goods sold / average inventory  (beginning and ending average) ­ Days in Inventory = 365 / (ITR) o Analysts’ Adjustments for LIFO Reserve 4

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School: Florida State University
Department: Accounting
Course: Financial Accounting
Professor: Ronald Pierno
Term: Summer 2015
Tags: Accounting, financial accounting, paterson, FSU, and ACG
Name: ACG Study Guide 3
Description: Chapters 6,8,9
Uploaded: 03/25/2018
20 Pages 46 Views 36 Unlocks
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  • Notes, Study Guides, Flashcards + More!
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