Term
| revenues generated from selling goods are called _____. |
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Definition
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Term
| cost of goods sold are the expenses incurred in the _______ of goods. |
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Definition
purchase or production
p.70
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Term
| what are the two acceptable approaches to account for the production an sale of merchandise? |
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Definition
perpetual inventory system and periodic inventory system
p.71 |
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Term
| in a perpetual inventory system, the Inventory account and COGS are constantly updated OR brought up to date at the reporting period while in the period inventory system, those accounts are constantly updated OR brought up to date at the reporting period. |
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Definition
in a perpetual inventory system, the Inventory account and COGS are constantly updated while in the period inventory system, those accounts are obrought up to date at the reporting period.
p.71-73 |
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Term
| what is the difference in the entry when you purchase/produce inventory if you are using the perpetual system as opposed to the periodic system? |
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Definition
perpetual:
inventory $1,000
Cash $1,000
periodic:
Purhcase $1,000
Cash $1,000 |
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Term
| what is the difference in the entry when you sell inventory if you are using the perpetual system as opposed to the periodic system? |
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Definition
no difference. both record
Cash $2,000
Sales $2,000
but an extra entry is made for the COGS as sales are made. |
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Term
| what are some of the extra entries you make in a perpetual system that you don't make in a periodic system? |
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Definition
- upon sale of goods, an entry is made to reflect the cost of goods being sold.
COGS $500
Inventory $500
- it is also customary to indicated the quanity of goods being added or sold from the inventory, so that you record the physcial quantity of goods on hand in inventory. this step is usually taken care by preparation of a special inventory journal.
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Term
| what does it mean to conduct a "physical inventory" ? |
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Definition
it means to physically count how many goods you have.
p.72 |
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Term
| what is "inventory shrinkage" and what is the entry for it look like? |
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Definition
any discrepancy between the physcial count of inventory with what would be expected based on journal entries, caused by theft, waste, etc.
COGS $xxx
Inventory $xxx |
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Term
| since COGS is not recorded as they occur in the periodic system, how we do go about calculating it? |
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Definition
- conduct a physical inventory at the end of the reporting period to figure out the cost of inventory deteremined to be on hand. this is known as the ending inventory. this number is also the ending balance to be reported in the Inventory account on the B/S.
- COGS = BI + P - EI
BI can be read of fthe blanace sheet from the prior period
P is summarized from all the purchases/production journal entries
EI is based on the physical count of inventory
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Term
| what is "COGS = BI + P - EI" in book keeping terms? |
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Definition
COGS $xxx
BI $xxx
COGS $yyy
Production $yyy
EI $zzz
COGS $zzz |
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Term
what are the advantages of the perpetual system?
what are the advantage of a periodic system? |
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Definition
perpetual--more advantageous from managing perspective because the level of inventory and COGS is known every moment so it can enable you manage inventory more efficiently.
periodic--it doesn't require keeping track COGS so it's an advantage from a bookkeeping perspective. it might be unduly burdensome to try to keep track of all goods sold accoridng to cost. however, technology has alleviated this burden (bar codes) |
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Term
| what are the two different methods of determining the cost of goods sold for a period when those costs vary? |
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Definition
| specific identification method (actual cost of each item is specifically identified) and cost flow assumption methods (LIFO/FIFO/average) |
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Term
| what are the different consequences in the balance sheet and the income statement when using LIFO or FIFO? |
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Definition
balance sheet consequence: the ending inventory is different (LIFO is lower, FIFO is higher)
income statement consequence: the gross profit is different (LIFO has a higher COGS, FIFO has a lower COGS therefore LIFO has a lower GP and FIFO has a higher GP) |
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Term
| how do you calculate gross profits from sales? |
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Definition
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Term
| what is the phenomenon referred to as "LIFO liquidation"? |
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Definition
because LIFO's balance sheet reflects the historical costs , so if the entity starts to sell inventory at higher quantities than the amount listed on the balance sheet, then its reported income in respect of those sales will be burdened by those outdated costs and producing artificially high income.
p.84 |
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Term
| what subsidary princple was created to implement the principle of conservatism when recording COGS? |
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Definition
the lower of cost or market principle. LCM requires the inventory be reported at cost or at market vaue if that market value is lower.
p.84 |
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Term
| for LCM, how do you determine the market value for inventory? |
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Definition
- replacement cost
BUT
replacement cost cannot exceed the inventory's net realizable value (selling price - selling cost)
AND
it cannot be lower than net realizable value - normal profit |
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Term
what is the COGS that should be used?
inventory at cost $10
replacement cost $10
selling price $14
selling costs $6 |
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Definition
historical cost and replacement cost both 10.
but. net realizable value is 8 (14 - 6), and the cost cannot exceed the net realizable value, so would use 8. |
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Term
what is the COGS that should be used?
inventory at cost $15
replacement cost $10
selling price $20
selling costs $5
normal selling profit $2 |
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Definition
LCM tells you that you would use $10 rather than $15.
but, it cannot exceed net realizable value, which is $15 (20-5), so using $10 is ok.
but, it also cannot be lower than net realizable value less normal selling profit, which is $13.
so you would use 13. |
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Term
| what are some other cost considerations when an entity converts raw material into finished goods? |
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Definition
the entity may need to measure these production costs (aka conversion costs). this consists of:
- cost of materials
- cost of labor
- related overhead
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Term
| what is "cost accounting" ? |
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Definition
| the process of assigning production costs to goods. |
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Term
| in cost accounting, what is the difference between product cost and period cost? |
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Definition
product costs are those directly associated with the goods, such as direct materials and direct labor.
period costs are those associated with teh general manufacturing and sales effort and are expenses as incurred.
e.g. overhead is an example that may be both a product cost (inventory and COGS) and period cost (heating bills for sales office).
p.86 |
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