Inventory Systems, Long-Lived Assets, and Financial Accounting Practice Questions

Practice vocabulary flashcards based on accounting lecture notes covering inventory systems, reporting errors, asset valuation, depreciation methods, and investment accounting.

Perpetual Inventory System

An inventory system where merchandise purchases are recorded directly into the Inventory account and the Cost of Goods Sold is updated every time a sale occurs.

Periodic Inventory System

An inventory system where merchandise purchases are recorded in a Purchases account and the Cost of Goods Sold is determined only by an end-of-period calculation.

FOB Shipping Point

A shipping term where ownership transfers to the buyer when the goods are shipped; the buyer is responsible for paying freight costs.

FOB Destination

A shipping term where ownership transfers to the buyer at the destination; the seller is responsible for paying freight costs.

Inventory Understatement (Ending)

A reporting error that causes the Cost of Goods Sold for the current year to be overstated and net income/retained earnings to be understated.

FIFO (First-In, First-Out)

An inventory cost method that assumes the oldest costs are assigned to goods sold first and ending inventory consists of the newest costs.

Specific Identification Method

An inventory method used when the specific costs of individual items can be identified, typically for unique or high-value inventory items.

Average Cost Method (Perpetual)

A method where the average cost of inventory is recalculated after every purchase.

Net Realizable Value (NRV) Write-down

An adjustment made when NRV is lower than cost, typically involving a debit to Cost of Goods Sold and a credit to Inventory.

Capitalized Expenditure

Costs added to an asset's acquisition cost, such as installation or expenditures that extend the asset's useful life.

Accumulated Depreciation

A contra-asset account representing the total depreciation recorded for an asset since it was acquired.

Diminishing-balance Method

A depreciation method that produces the highest amount of depreciation expense in the early years of an asset's life.

Units-of-production Method

A depreciation method that determines expense based on the actual usage of the asset rather than the passage of time.

Carrying Amount

The value of an asset calculated as Cost minus Accumulated Depreciation; used to determine the gain or loss on disposal.

Non-strategic Investment

An investment typically representing less than $20\%$ ownership in another company.

Cost Method

An accounting method for investments where the asset is carried at its original cost and dividends are recorded as income.

FVTPL (Fair Value Through Profit or Loss)

An investment classification where unrealized gains and losses from changes in fair value are reported in the Income Statement.

FVTOCI (Fair Value Through Other Comprehensive Income)

An investment classification where unrealized gains and losses are recorded in Other Comprehensive Income (OCI) and accumulated in a separate equity account.

Equity Method

An accounting method used for ownership between $20\%$ and $50\%$ where the investor increases the investment for their share of investee income and decreases it for dividends received.

Accrual Basis Accounting

The accounting basis required by GAAP where revenue is recognized when earned and expenses are recognized when incurred.

Temporary Account

Accounts such as Revenue, Expenses, and Dividends that are closed at the end of an accounting period.

Permanent Account

Balance sheet accounts such as Assets, Liabilities, and Equity that carry their balances into the next accounting period.

Deferred Revenue

A liability account used to record cash received from a customer before the service is provided or the revenue is earned.

NSF (Non-Sufficient Funds) Cheque

A cheque returned by the bank because the writer's account has insufficient funds, requiring the company to debit Accounts Receivable and credit Cash.

AFDA (Allowance for Doubtful Accounts)

A contra-asset account used to record the estimated amount of accounts receivable that may become uncollectible.