Upgrade to remove ads
Only $35.99/year

Financial Accounting Chapter 9 (Midterm II)

Terms in this set (51)

Working Capital
The difference between a firm's current assets and its current liabilities
Current Ratio / Working Capital Ratio
Current Assets / Current Liabilities
What do working capital and current ration provide information about?
Liquidity
Liquidity
A firm's ability to meet short term obligations as they come due
When is working capital positive?
When Assets > Liabilities
When is the current ratio > 1?
When Assets > Liabilities
Merchandising Firms
Firms that acquire inventory items ready for sale; acquisition costs include the invoice price less discounts or prompt payment, plus the cost of transporting, receiving, unpacking, inspecting and shelving, as well as costs incurred to record the purchases in the accounts
Manufacturing Firms
Firms that transform raw materials, purchased parts, and components into finished products
Direct/Raw Materials Cost
Cost of materials a manufacturing firm can trace directly to units of product it manufactures
Direct Labor Cost
Cost of labor to transform raw materials into a finished product
Manufacturing Overhead Costs
A variety of indirect cots that the firm can not directly trace to products manufactured but are essential for production to occur
Product Costs
Assets accumulated in various inventory accounts; what all costs are treated as until a firm sells its products and recognizes revenue
Period Expenses
Not assets; selling and administrative costs recognized in the period when they consume the goods or services
Raw Materials Inventory
Account that shows the cost of raw materials purchased but not yet transferred to the factory floor
Work-In-Progress Inventory
Account that accumulates the cost of direct labor used in production and manufacturing overhead costs
Finished Goods Inventory
Measures the manufacturing cost of units completed but not yet sold
Holding Gain
The increase in inventory market value subsequent to acquisition
Under what accounting standards can firms remeasure inventories upward to an amount exceeding acquisition cost?
Neither
Holding Loss
The decrease in inventory market value subsequent to acquisition
Lower-of-Cost-or-Market Basis
Basis upon which GAAP and IFRS require firms to write down inventories if their market value declines blow acquisition cost, impairing the inventory
Under what accounting standards can firms remeasure inventories upward to an amount not exceeding acquisition cost after earlier impairment?
IFRS
Specific Identification
Includes use of serial numbers and barcodes to trace a unit to its purchase making COGS and ending inventory easier to identify and record
What are the three cost flow assumptions?
1. Weighted Average
2. FIFO
3. LIFO
Weighted Average
A firm calculates the average costs of all units available for sale during the accounting period, including the cost applicable to the beginning inventory. This average cost applied to the units sold during the period and the units on hand at the end of it
FIFO
Assigns the costs of the earliest units acquired to the units sold and assigns the costs of the most recent acquisitions to the ending inventory
LIFO
Assigns the costs of the latest units acquired to the withdrawals and assigns the costs of the oldest uits to the ending inventory
What cost flow assumption results in balance sheet figures being closest to current cost?
FIFO
What cost flow assumption results in COGS being out of date?
FIFO
What cost flow assumption results in net income being highest while prices are rising?
FIFO
What cost flow assumption results in net income being lowest while prices are falling?
FIFO
What cost flow assumption results in balance sheet figures being much lower than current costs?
LIFO
What cost flow assumption results in COGS being closest to current cost?
LIFO
What cost flow assumption results in results in net income being smallest while prices are rising?
LIFO
What cost flow assumption results in net income being largest while prices are falling?
LIFO
What cost flow assumption results in least fluctuation in gross margins?
LIFO
The Weighted Average cost flow assumptions most similarly resembles which other?
FIFO; when inventory turns over rapidly its nearly identical
COGS Percentage
Ratio of COGS / Sales Revenue; the larger the ratio the greater the portion of sales revenues required to cover product costs therefore resulting in less profitability
Inventory Turnover Ratio
Ratio of COGS/Average Inventory, measuring how quickly firms sell their inventory
What are the results of a rising COGS % and rising Inventory Turnover Ratio
1. Lower profit margin
2. Greater total asset turnover
(whichever is greater determines ROA)
What are the results of a falling COGS % and falling Inventory Turnover Ratio
1. Greater profit margin
2. Lower total asset turnover
(whichever is greater determines ROA)
What are the results of a rising COGS % and falling Inventory Turnover Ratio
1. Lesser Profit Margin
2. Lesser Asset Turnover
3. Lesser ROA
What are the results of a falling COGS % and rising Inventory Turnover Ratio
1. Greater Profit Margin
2. Greater Asset Turnover
3. Greater ROA
Cash/Earnings/Operating Cycle
The time between a firm's first acquiring inventory, then making and selling the product and ultimately receiving cash from customers and paying cash to suppliers
Cash/Earnings/Operating Cycle Formula
Days Inventory + Days AR - Days Account Payable (shorter the cycle the more profitable the firm)
Warranty
Defined performance liability for service or repairs for some period after sale
Warrant Liability
Liability account estimated for warranties at time of sale
Restructuring
Involves substantial changes to the scope or conduct of a business
Restructuring Liability
Estimated cost of restructuring which is required to be estimated and recorded as an expense
LIFO Inventory layer
the amount added to inventory for a year when inventory purchases exceed sales and quantitiy of inventory increases
LIFO Liquidation
Dipping into LIFO layers, must be carefully considered as LIFO reduces current taxes in periods of rising purchase prices and rising inventory quantities . If inventory declines the opposite effect occurs: LIFO layers leave the balance sheet and become expenses
LIFO Reserve
Excess of FIFO or current cost over LIFO cost of inventories that must be disclosed in notes of financial tatements
Other sets by this creator