ACG2021 Chapter 6 (Principles of Financial Accounting)

A business should use the same accounting methods and procedures from period to period

A businesses’ financial statements must report enough information for outsiders to make knowledgeable decisions about the company.

States that all significant information that could influence the decisions of users of financial statements must be reported

*A \$10,000 could be significant for a small business, but insignificant for a large business.

A business should report the least favorable figures in financial statements when two or more options are present

-Anticipate no gains but provide for all probable losses.
-If in doubt, record an asset at the lowest reasonable amount and a liability at the highest reasonable amount.
-When there’s a question, record an expense rather than an asset.
-When you are faced with a decision between two possible options, you must choose the option that undervalues, rather than overvalues, your business.

-When a company runs out of inventory

Once a Year

A method used to determine the COGS and the ending inventory when the unit cost during the period changes.

*If the unit cost during the period did not change, then you would just use


Ending Merchandise Inventory = Number of units on hand x Unit Cost


Cost of Goods Sold = Number of units sold x Unit Cost


The four types of methods are
1)Specific Identification
2)First-in, First-out (FIFO)
3)Last-in, First-out (LIFO)
4)Weighted-average

An inventory costing method which is based on the cost of a specific unit of inventory. So, that specific unit has an easily identifiable unit that has a specific cost attached to it.

An inventory costing method.

The first units purchased are assumed to be the first unit sold. So, the first unit sold has the Cost attached to the first unit purchased.



*Understand on the table why it is FIFO

An inventory costing method.


The last units purchased are assumed to be the first units sold. So, the first unit sold has the Cost attached to the last unit purchased.



*Understand on the table why it is LIFO

Answer: Its \$1,000 (Always keep moving back)

(aka moving average method)
An inventory costing method.

Weighted-average unit cost = Total Cost of goods available for sale / Number of units available for sale


*Understand on the table why it is weighted-average method

The FIFO is better during times of increasing cost since it improves their financial position and attracts inventors.


The LIFO during times of increasing cost is worse since it worsens their financial positions and does not attract investors as well. But, it decreases the taxable income, so they pay the lowest income tax.



The weighted average cost is a middle ground between the FIFO and LIFO.

Rule that merchandise inventory should be reported in the financial statements at whichever is lower - its historical cost or its market value.

*The market value is determined by the CRC (Current Replacement Cost)

*The historical cost is the original cost to acquire or produce a good

-Shows how quickly merchandise inventory is sold



Inventory Turn-Over = Cost of Goods Sold / Average Merchandise Inventory



Average Merchandise Inventory = (Beginning Merchandise Inventory + Ending Merchandise Inventory) / 2



*Higher is better since they are selling quickly, and the inventory isn't just sitting their collecting dust



*Used as Inventory Turn over in days' sales of inventory formula

Days’ sales in Inventory = 365 days / Inventory Turnover


ex)
The Inventory turnover is 4 times per year.

So, the Days’ sales in Inventory is 91.25 days.

*Companies seek to have a high inventory turnover, which translates into a low days’ sales in inventory. So, lower is better.

Gross Profit = Total Revenue - COGS

COGS = Cost of Goods Available for Sale - Ending Merchandise Inventory


*(also, another formula is # of units sold x unit cost)

*This is perpetual and not peridoic because it keeping a running balance tthorughout the month