Accounting Chapter 5

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Accounting Chapter 5
2014-03-18 11:29:15
Accounting Chapter
Accounting Chapter 5
Accounting Chapter 5
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  1. Chapter 5 Conceptual chapter objectives (2)
    • 1. Identify the items making up merchandise inventory
    • 2. Identify the costs of merchandise inventory.
  2. Chapter 5 analytical chapter objectives
    • 1. Analyze the effects of inventory methods for both financial and tax reporting
    • 2. Analyze the effects of inventory errors on current and future financial statements
    • 3. Assess inventory management using both inventory turnover and days' sales in inventory.
  3. Chapter 5 procedural objectives
    • 1. Compute inventory in a perpetual
    • system using the methods of specific identification, FIFO, LIFO, and weighted
    • average.
    • 2. Compute the lower of cost or
    • market amount of inventory.
    • 3. Compute inventory in a periodic
    • system using the methods of specific identification, FIFO, LIFO, and weighted
    • average (see text for details).
    • 4. Apply both the retail inventory
    • and gross profit methods to estimate inventory (see text for details).
  4. Merchandise inventory includes goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include: (3)
    • 1. goods in transit
    • 2. goods in consignment
    • 3. goods damaged or absolete
  5. FIFO (first-in, first-out)
    assumes cost flow in the order incurred.
  6. LIFO (Last-in, first-out)
    Assumes cost flow in the reverse order incurred.
  7. Weighted average
    assumes costs flow at an average of the costs available.
  8. Advantage of the Weighted Average method
    smooths out price changes
  9. Advantage to FIFO method
    ending inventory approximates current replacement cost.
  10. avantage of LIFO method
    better matches current costs in costs of goods sold with revenues.
  11. Inventory must be reported at market value when...
    "market" is lower than cost.
  12. define market:
    as current replacement cost (not sales price_. Consistent with the conservatism constraint
  13. Lower of Cost or Market can be applied three ways
    • 1. separately to each individual item
    • 2. to major categories of items
    • 3. to the whole inventory
  14. Financial statement effects of inventory errors
    by having an inventory error it affects Cost of goods sold and Net income in an income statement
  15. In the Balance sheet what are the financial statement effects of inventory errors?
    an inventory error affects assets and equity.