Term Definition
Net Sales 1). allowance for returns & reduction for discounts 2). (sales – sales discounts – sales returns & allowances)
Sales Discount 1). incentive for customers to pay early2). ex. "sells x to customer for $ on account w/ terms 2/10, net 30"(offer 2% discount if pay w/in 10 days instead of 30)
Sales Returns & Allowances 1). when customers return merchandise or receive damaged goods 2). contra-account to cash
Reporting Net Sales (Multi-step Income Statement) Net Sales – CoGS = Gross Profit – S&A Exp. = Operating Income – Other Gains/Losses & Income Tax Exp. = Net Income
Inventory cost includes… freight-in, sales tax, and insurance during transit
Periodic System 1). Debits all inventory items to Purchases acct.2). NO entry to update CoGS/Inventory accts. w/ each sale 3). physical count @ year end to determine CoGS
Perpetual System 1). Debits all inventory items to Inventory acct. 2). Updates CoGS & Inventory acct. with each sale 3). Physical count @ year end to determine Loss on Shrinkage
Accounting for Inventory Systems 1). Periodic System – all items purchased for resale are debited to Purchases acct. & uses CoGS formula2). Perpetual System – running total of inventory on hand & identifies losses due to theft/shrinkage/spoilage
Goods in Transit goods ordered but not yet received
FOB Shipping Point 1). title transfers to buyer when goods are accepted by common carrier 2). liability of buyer's when gets on shipping vessel
FOB Destination 1). title transfers when goods are delivered to destination of buyer 2). liability of seller's until reaches buyer's hands
Consigned Goods owner (consignor) transfers physical goods to agent (consignee) for purposes of selling without giving up legal title
Goods called in if goods are ordered, as long as goods are identified/separate, they belong to buyer
Inventory Cost Flow Methods 1). Specific Identification2). Average Cost Method3). First In First Out (FIFO)4). Last In First Out (LIFO)
Specific Identification Method 1). small quantity of inventory, high-priced items2). impractical for most businesses 3). big items (fridges, cars, etc.)
Average Cost Method 1). uses weighted average of all costs for GAS (Goods Available for Sale) and assigns average cost to both Ending Inventory & CoGS 2). Avg. Cost per Unit = (total cost of GAS) / (total # units) 3). Ending Inv. = # units left @ avg. cost/unit
FIFO 1). cost of FIRST item purchased = cost of FIRST item sold (CoGS) 2). assume inflationary environment where prices increase w/ time
Goods Available 1). End Inventory + CoGS 2). if not in one, then MUST be in the other
Advantages of FIFO 1). assigns current/most recent cost to ending inventory (end inv. = most recent purchases 2). good method when inv. turnover is rapid (bakery)
Disadvantages of FIFO 1). fails to match most recent costs with revenues 2). if prices are rising, matches oldest unit costs with current revenues, making Net Income higher (overstated)
Advantage of Average Cost Method assigns equal unit costs on both ending inventory & CoGS
LIFO 1). cost of last item purchased = cost of first item sold 2). assume prices increase over time
Advantages of LIFO 1). matches current costs with current revenues 2). when prices rise, Net Income is always less (reduces Income taxes)
LIFO Conformity Rule If you use LIFO for tax purposes, MUST use this method for financial reporting purposes
Disadvantages of LIFO 1). gives non-current value to inventory on balance sheet 2). NOT part of IFRS
Which method would produce higher CoGS? LIFO
Which method would produce higher Net Income for 2015? FIFO
Which method would produce higher cost of GAS for 2015?
In what direction do you think prices have been moving during the year?
Gross Profit Method 1). estimates Inventory for interim FS2). estimates value of Inventory destroyed/lost by casualty/theft 3).
Inventory Turnover Ratio 1). how many times the entire inventory balance is sold/turned over during the year2). measures if company keeps excess stock of inventory (want high inventory turnover & low inventory carrying costs, risk of loss and obsolescence)3). CoGS / avg. inv
ACCT Chapter 5

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