FAR 1 Chapter 7: Inventory Accounting Study Guide

Vocabulary flashcards covering core inventory accounting concepts from Chapter 7, including inventory equations, periodic vs. perpetual methods, cost flow assumptions, gross vs. net purchase methods, inventory errors, and dollar-value LIFO.

COGAS

EI + COGS

Items reported as inventory on balance sheet

Goods out on consignment at another store, raw materials, work in process, finishes goods

Periodic Method

($\text{COGS}$) is calculated at the end of the year from the inventory equation, purchases during the year are debited to the purchases account (returns credited), and ending inventory ($\text{EI}$) is determined by a physical count.

Purchase of inventory - periodic method entry

Debit purchases Credit AP

Sales during year periodic method entry

Debit cash or AR credit sales rev

Periodic method end of year entry

Debit inventory(end) and COGS , Credit inventory(beg) and purchases

Perpetual Method

An inventory method where purchases are debited directly to the inventory account (returns credited) and $\text{COGS}$ is recorded with each sale throughout the year (one entry for sales revenue and one entry for $\text{COGS}$), requiring no end-of-year entries.

Purchase of inventory perpetual method entry

Debit inventory credit AP

Sales during year perpetual method entry

Debit COGS credit inventory

Debit cash or AR credit sales rev

Specific Unit

A cost flow assumption that includes the cost of specific items in $\text{COGS}$, primarily used by companies with expensive items and a small amount of inventory.

Weighted Average Cost per Unit

The cost flow metric used in the periodic average cost method calculated as COGAS/ units in inventory- doesn’t matter when the purchase happened $\text{COGS} = \text{weighted avg cost/unit} \times \text{units sold}$.

Moving Average

The perpetual inventory version of the average cost method- take into account when the purchase happens

FIFO (First-In, First-Out)

same ending inventory and $\text{COGS}$ balances under both periodic and perpetual inventory systems.

LIFO (Perpetual)

$\text{COGS}$ is calculated using only inventory purchased prior to the date of the sale.

FOB Shipping Point

A shipping term where custody of goods changes at the time they are shipped, at which point the sale occurs and inventory is taken off the seller's books.

FOB Shipping Destination

A shipping term where custody of goods changes when they are received/delivered, at which point the sale occurs and inventory is taken off the seller's books.

LIFO Reserve

The difference between the LIFO and FIFO inventory balances recorded in an allowance account ('allowance to reduce inventory to LIFO') when using FIFO internally and LIFO externally for tax purposes. - the ending value of allowance account

LIFO Effect and entry

The adjustment needed to bring the LIFO reserve balance to its required amount, recorded by debiting $\text{COGS}$ and crediting Allowance to Reduce Inventory to LIFO.

Costs included in cost of inventory

Sales tax, freight in, insurance during shipment

Gross Method (Purchases)

An accounting method where purchases and accounts payable are recorded at the full invoice amount at the date of purchase, and any discounts taken during the discount period are credited to a contra-asset account.

Purchase Discounts

A contra-asset account that is credited under the gross method when payment is made within the discount period.

Net Method (Purchases)

An accounting method where purchases and accounts payable are recorded net of the discount at the date of purchase.

Purchase Discounts Lost

An account classified under other expenses/losses that is debited under the net method when an invoice is paid after the discount period has expired.

COGS Error

= NI error in other direction

Ending Inventory error

= error in RE

Dollar-Value LIFO Price Index Formula

$\text{PI} = \frac{\text{EI @ CY}}{\text{EI @ BY}}$,

Dollar-Value LIFO Layer Rules

Core procedural rules stating that: 1) No new layer is created when the new base-year inventory is less than the current layers, and 2) An old layer is NEVER added back once liquidated.