In a period of rising prices, the costs allocated to ending inventory may be understated in the

1.When the terms are FOB shipping point, the ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. When the terms are FOB destination, the ownership of the goods remains with the seller until the goods reach the buyer.

2.Terms is the agreement between the buyer and seller of goods or services. An example of terms on an account, debit inventory and credit accounts payable.

3. Inventory is accounted for at cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. First-In, First-Out(FIFO) method assumes that the earliest goods purchased are the first to be sold, ending inventory is based on the prices of the most recent units purchased. Last-In, First-Out(LIFO) assumed that the latest goods purchased are the first to be sold, ending inventory is based on the prices of the oldest units purchased. Average-Cost method allocated the cost of goods available for sale on the basis of the weighted-average unit cost incurred, then applied the weight-average unit cost to the units on hand to determine the cost of the ending inventory.

Physical movement of goods means inventory actual timing of when goods are sold, which involves moving inventory physically from seller to buyer. The term Cost Flow Assumptions means the assumption that is made for the purpose of determining the cost of inventory items that are sold when preparing financial statements. There is no accounting requirement that the cost flow assumption be consistent with the physical movement of the goods.

4.Effects on income statement: In periods of inflation, FIFO produces a high net income; LIFO produces a lower net income. If prices fall, FIFO will report the lowest net income and LIFO the highest. Regardless of whether prices are rising or falling, average-cost produces net income between FIFO and LIFO.

Effects on balance sheet: under FIFO, the costs allocated to ending inventory will approximate their current cost. Under LIFO, the costs allocated to ending inventory may be understated in terms of current cost.

Effects on tax: under FIFO, inventory and net income are higher, resulting in high income taxes. Under LIFO, it has lower net income, so it results in lowest income taxes during times of rising prices.

5. Lower of Cost or Market is the company recorded the cost of inventory at whichever cost is lower, the original cost or its current market price. First, determine the purchase cost of each item in inventory. Second, determine the market price. Third, determine whether the original price or market price is lower. Lastly, to calculate the LCM value, use the lower price to multiply the units.

6. Inventory turnover is calculated as cost of goods sold divided by average inventory. It indicates how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. Investment analysts at one time suggested that Office Depot had gone too far in reducing its inventory, they were seeing too many empty shelves. Too high an inventory turnover may indicate that the company is losing sales opportunities because of inventory shortages. Management should closely monitor this ratio to achieve the best balance between too much and too little inventory.

7. LIFO reserve is the amount that companies using LIFO are required to report the difference between inventory reported using LIFO and Inventory using FIFO. Reporting the LIFO reserve enables analysts to make adjustments to compare companies that use different cost flow methods, and can have significant effect on ratios that analysts commonly use.

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