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?