What is the difference between the flow of costs and the physical flow of goods?

What is the difference between the flow of costs and the physical flow of goods?

Flow of costs refers to the assumption that is made for the purpose of determining the cost of inventory items that are sold when preparing financial statements. The cost flow assumption that a business makes may have nothing to do with the actual flow of inventory into and out of the business. The physical flow of goods refers to the actual timing of when goods are sold. For example, a grocery store may use a FIFO cost flow assumption for financial statement purposes and this may reflect the physical flow of some inventory items but not others. The grocer will put the newer items at the back on the shelf and pull the oldest items to the front for the customer to purchase (FIFO) but the customer may look for the freshest item at the back of the shelf (e.g. milk) to purchase (LIFO).


More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.

In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.

In an inflationary period, FIFO will produce the largest amount of total assets. (Refer to the discussion for Question 31.) The unsold items, inventory, are the highest cost items. Consequently, assuming rising prices, FIFO flow produces a higher inventory amount than would be the case under a LIFO flow.

More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.

In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.

In an inflationary period, i.e., a period where prices are consistently rising, FIFO will produce the highest amount of income. This is true because the items purchased first (and at the lowest cost) are the items that are deemed sold first whose cost is charged to expense. The highest cost items remain in the asset account inventory. Since the lowest cost items have been expensed, net income will be higher than it would be assuming a LIFO flow.

More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

What are some advantages and disadvantages of using the FIFO method of inventory valuation?

What are some advantages and disadvantages of using the FIFO method of inventory valuation?

FIFO allocates the cost of the first units purchased to the first units sold; consequently, in a period of rising prices, this would produce a higher net income. This may be an advantage for the purpose of financial reporting if reporting a higher profit is desired. However, this is a disadvantage for tax reporting because a higher profit means paying more tax. FIFO also tends to best match physical flow for most products.

More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

What are some advantages and disadvantages of the specific identification method of accounting for inventory?

What are some advantages and disadvantages of the specific identification method of accounting for inventory?

One advantage of the specific identification method is that both the inventory account and cost of goods sold reflect the actual amounts on hand and sold. This method is usually required for high cost items such as automobiles, boats, etc. One disadvantage of this method is that recordkeeping can become burdensome for high-volume, lower-priced items.

More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

What is the effect on the accounting equation of recognizing uncollectable accounts expense?

What is the effect on the accounting equation of recognizing uncollectable accounts expense?

Recognizing uncollectible accounts expense reduces accounts receivable on the asset side and reduces retained earnings on the equity side.

More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

What is the net realizable value of receivables?

What is the net realizable value of receivables?

The net realizable value is the amount expected to be collected from accounts receivable. It is the face value of receivables less an allowance for estimated uncollectible accounts.

More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

What is the difference between accounts receivable and notes receivable?

What is the difference between accounts receivable and notes receivable?

Accounts receivable are the expected future receipts that arise when a company permits its customers to buy now and pay later. The amounts are usually small with a short term to maturity.
Notes Receivable have longer terms to maturity and are usually for larger amounts. The note specifies the maturity date, interest rate, and other credit terms.

More Questions Accounting Chapter 5:

1. What is the difference between the flow of costs and the physical flow of goods?
2. In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
3. In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
4. What are some advantages and disadvantages of using the FIFO method of inventory valuation?
5. What are some advantages and disadvantages of the specific identification method of accounting for inventory?
6. What is the effect on the accounting equation of recognizing uncollectable accounts expense?
7. What is the net realizable value of receivables?
8. What is the difference between accounts receivable and notes receivable?

The language of business

The language of business

Accounting provides information that is useful in making decisions by all participants in the market for resource goods and services, both profit-oriented and nonprofit oriented.

What type of income or profit does an investor expect to receive in exchange for providing financial resources? What time of income does a creditor expect from providing financial resources to an organization or business?

What type of income or profit does an investor expect to receive in exchange for providing financial resources? What time of income does a creditor expect from providing financial resources to an organization or business?

Investors expect a distribution of the business's profits as a return on their financial investment (capital allocation).

Creditors lend financial resources to businesses and receive interest as a return or profit on the loan.

Describe a non-for-profit or nonprofit enterprise. What is the motivation for this type of entity?

Describe a non-for-profit or nonprofit enterprise. What is the motivation for this type of entity?

Not-for-profit or nonprofit entities provide goods or services to consumers for humanitarian or special reasons rather than to earn a profit for owners. For example, certain not-for-profit entities allocate resources to provide for research of diseases or social/environmental welfare; others allocate resources to promote the arts and provide education.

Distinguish between elements of financial statements and accounts.

Distinguish between elements of financial statements and accounts.

Items reported on the financial statements are organized into classes or categories called elements. The ten elements of financial statements are:
1. Assets
2. Liabilities
3. Equity (Stockholders' Equity)
4. Investments by Owners (Contributed Capital)
5. Revenue
6. Expenses
7. Distributions (Dividends)
8. Net Income
9. Gains
10. Losses

Accounts are specific items or subclassifications of the elements. Examples of accounts include cash, land and common stock.

What role do assets play in business profitability?

What role do assets play in business profitability?

Assets, the economic resources of a business, are used to produce earnings.

To whom do the assets of a business belong?

To whom do the assets of a business belong?

The assets of a business belong to that business entity and there may be claims on the assets. Claims on the assets belong to resource providers.

Describe the differences between creditors and investors.

Describe the differences between creditors and investors.

Creditors are individuals and/or institutions that have provided goods or services to the business which are not yet paid for, or loaned money to the business. These parties have first claim to the assets of the business, and the owners have a residual interest in the assets.

Name the accounting term used to describe a business's obligations to creditors.

Name the accounting term used to describe a business's obligations to creditors.

The term "liabilities" is used to describe creditors' claims on the assets of a business.

What is the accounting equation? Describe each of its three components.

What is the accounting equation? Describe each of its three components.

The accounting equation is:
ASSETS - LIABILITIES = STOCKHOLDERS' EQUITY
or
ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY

Assets are the economic resources used by a business for the production of revenue. Liabilities are obligations of a business to relinquish assets, provide services, or accept other obligations. Equity, also called "residual interest" or "net assets", is the portion of the assets remaining after the creditors' claims have been satisfied (i.e., Assets - Liabilities).

Who ultimately bears the risk and collects the rewards associated with operating a business?

Who ultimately bears the risk and collects the rewards associated with operating a business?

The owners ultimately bear the risk and collect the rewards associated with operating a business.

What does a double-entry bookkeeping system mean?

What does a double-entry bookkeeping system mean?

A double-entry bookkeeping system is one in which every transaction affects at least two accounts. A transaction can affect both assets and claims (liabilities and equity) or only assets or only claims. In order to "balance" the accounting equation, every transaction requires a "double entry."

How does acquiring capital from owners affect the accounting equation?

How does acquiring capital from owners affect the accounting equation?

Capital is acquired from owners by issuing stock to them. When stock is issued, the assets of the business increase and the stockholders' equity increases.

What is the difference between assets that are acquired by issuing common stock and those that are acquired by using retained earnings?

What is the difference between assets that are acquired by issuing common stock and those that are acquired by using retained earnings?

Assets that are acquired by issuing common stock are the result of investments by owners. Assets that are acquired by using retained earnings are assets the business acquires through its earnings activities.

How does earnings revenue affect the accounting equation?

How does earnings revenue affect the accounting equation?

Revenue increases the asset side of the accounting equation and also increases the retained earnings account in the stockholders' equity section of the equation.

What are the three primary sources of assets?

What are the three primary sources of assets?

The three primary sources of assets are

(1) investments by owners (issue of stock),

(2) borrowing from creditors, and

(3) earnings activities.

What is the source of retained earnings?

What is the source of retained earnings?

Retained earnings are a result of a business retaining its earned assets, rather than distributing those earnings to its owners.

How does distributing assets (paying dividends) to owners affect the accounting equation?

How does distributing assets (paying dividends) to owners affect the accounting equation?

Distributions to owners, called dividends, decrease the asset side of the accounting equation and also decrease the retained earnings account in the stockholders' equity section of the equation.

What are the similarities and differences between the dividends and the expenses?

What are the similarities and differences between the dividends and the expenses?

Dividends and expenses are similar in that they both decrease assets and affect the accounting equation in the same way (i.e. reduction of retained earnings). However, dividends differ from expenses because of the nature of the decline in assets. Expenses reduce assets as the result of a firm's efforts to earn revenue. Dividends reduce assets because of a transfer of wealth to the owners.

What four general-purpose financial statements do business enterprises use?

What four general-purpose financial statements do business enterprises use?

1) Income Statement - measures the difference between the asset increases and the asset decreases that were associated with operating a business during a particular accounting period.

(2) Statement of Changes in Stockholders' Equity - explains the effects of transactions on stockholders' equity during the accounting period.

(3) Balance Sheet - lists the assets and the corresponding claims against the entity as of a particular date.

(4) Statement of Cash Flows - explains how a company obtained and used cash during the accounting period.

Which of the general-purpose financial statements provides information about the enterprise at a specific designated date?

Which of the general-purpose financial statements provides information about the enterprise at a specific designated date?

The balance sheet provides information about the enterprise at a particular point in time.

What causes a net loss?

What causes a net loss?

A net loss occurs when expenses exceed revenues in a given accounting period.

How are asset accounts usually arranged in the balance sheet?

How are asset accounts usually arranged in the balance sheet?

Asset accounts are arranged on the balance sheet in accordance with their level of liquidity (those that can be most quickly converted to cash are listed first).

How do temporary accounts differ from permanent accounts? Name three temporary accounts. Is retained earnings a temporary or a permanent account?

How do temporary accounts differ from permanent accounts? Name three temporary accounts. Is retained earnings a temporary or a permanent account?

Temporary accounts are used to capture information for a single accounting period. The balances in temporary accounts are transferred out of the accounts at the end of the accounting period. Temporary accounts have zero balances at the beginning of an accounting period. Temporary accounts include revenue accounts, expense accounts and dividends. Permanent accounts carry over from one accounting period to the next. Retained Earnings is a permanent account.

What is the historical cost concept and how does it relate to verifiability?

What is the historical cost concept and how does it relate to verifiability?

The historical cost concept requires that most assets be reported at the amount paid for them regardless of their increase or decrease in value. It is related to the qualitative characteristic of verifiability in that information can be independently verified. The historical cost is verified, while a change in value is subjective.