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11 Cards in this Set
- Front
- Back
Items included in invetory:
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merchandise inventory, raw materials inventory, work in process inventory, finished goods inventory
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Costs included in inventory purchases
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-(the cost principle requires that inventory be recorded at the price paid or the consideration given)- invoice price, freight, inspection costs, preparation costs
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goods available for sale=
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Beginning inventory+purchases
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Costs of goods sold=
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Goods available for sale-ending inventory
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Inventory Costing methods
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1. Specific identification
2. First-in, first out 3. Last in, first out 4. Weighted average |
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FIFO
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The costs of most recent purchases are in ending inventory. Start with beginning date and add units purchased until you reach the number in ending inventory. Advantage- ending inventory approximates current replacement cost.
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LIFO
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The costs of the oldest purchases are in ending inventory. Start with beginning inventory and add units purchased until you reach the number in ending inventory. Advantage- Better matches current costs in cost of goods sold with revenues
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Average Cost
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Cost of goods available for sale/ number of units available for sale. Advantage-smoothes out price changes
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Manager’s choice of inventory methods-
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1) Managers prefer to report higher earnings for their companies (net income effects)
2) Managers prefer to pay the least amount of taxes allowed by law as late a possible ( income tax effects) |
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LIFO conformity rule
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If LIFO is used on the income tax return, it must alse be used to calcualate inventory and cost of goods sold for financial statements.
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Inventory turnover=
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Cost of goods sold/average inventory,
average inventory is (beg inv.+end inv)/2 |