Transactions Affecting Net Purchases (LO 8-3)
These expenditures are included in the cost of inventory.
What are expenditures necessary to bring inventory to its condition and location for sale or use?
This method assumes that items sold are those that were acquired first.
What is first-in, first-out (FIFO)?
This rule requires companies using LIFO to measure taxable income to also use LIFO to measure income reported to investors and creditors.
What is the LIFO conformity rule?
The prices of these goods have experienced periods of declining prices.
What are personal computers?
This indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and to provide a profit.
What is the gross profit ratio?
The three steps in using DVL to estimate ending inventory.
What are convert ending inventory to base year cost, identify the layers of ending inventory created each year, and restate each layer using the cost index in the year acquired?
These represent reductions in the amount to be paid if remittance is made within a designated period of time.
What are purchase discounts?
The four inventory cost flow assumptions.
What are specific identification, average cost, first-in, first-out (FIFO), and last-in, first-out (LIFO)?
Companies choosing a method that most closely approximates specific identification would consider this.
What is the physical flow of inventory?
Account used to record the conversion to LIFO from internal records.
What is LIFO reserve or LIFO allowance?
This combined with higher than normal inventory levels may indicate the potential for decreased production, obsolete inventory, or need to decrease prices to sell inventory.
What is a slowing turonver ratio?
The cost index for the base year is set at this.
What is 1.00?
When using a periodic inventory system, freight costs included in the cost of inventory are recorded in this account.
What is freight-in or transportation-in?
This method assumes that items sold are those that were most recently acquired.
What is last-in, first-out (LIFO)?
This method is chosen by companies to reduce income taxes in periods when prices are rising.
What is LIFO?
When this occurs, cost of goods sold will partially match noncurrent costs with current selling prices.
What is LIFO liquidation?
Two reasons managers monitor inventory levels.
What are to ensure that inventories needed to sustain operations are available and to hold the cost of ordering and carrying inventories to the lowest possible level?
Advantages of DVL.
What are simplification of recordkeeping compared to unit LIFO, minimization of probability of liquidation of LIFO layers, and can be used by firms that do not replace units sold with new units of the same kind?
Two methods used to account for purchase discounts.
What are the gross and net methods?
This method assumes that items sold and items in ending inventory come from a mixture of all the goods available for sale.
What is the average cost method?
The choice of inventory method determines these three items.
What are how closely reported costs reflect the actual physical flow of inventory, timing of reported income and income tax expense, and how well costs are matched with associated revenues?
Reasons companies may use LIFO for external reporting but maintain internal records using a different inventory method.
What are high recordkeeping costs for LIFO, contractual agreements, and using other methods for pricing decisions?
This can reduce earnings quality because it can mask permanent earnings.
What is manipulating income?
Formula for determining the cost index for a particular layer year.
What is Cost in layer year divided by cost in base year?
These charges on outgoing goods are reported either as part of cost of goods sold or as an operating expense.
What are shipping (freight) charges?
This method is used by companies selling unique, expensive products with low sales volume.
What is specific identification?
A company is/is not required to choose an inventory method that approximates the actual physical flow of goods.
What is "is not"?
A _________ in the LIFO reserve increases reported profits.
What is a decrease?
This is a system used by manufacturers to coordinate production with suppliers so raw materials or components arrive just as needed in the production process.
What is a just-in-time (JIT) system?
Two external indexes that can be used to determine an index for a DVL pool.
What are the Consumer Price Index (CPI) and the Producer Price Index (PPI)?