Question
In: Accounting
•Describe how costs flow from inventory to cost of goods sold for the following methods: FIFO...
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Expert Solution
^ Costs flow from Inventory to COGS:
Flow of costs refers to the manner or path in which costs moved through a firm.
Under the FIFO method, the first raw material purchased would be moved from the inventory of raw material and charged to the cost of goods sold as an expense. Conversely, if the company used the LIFO method, the last unit of raw materials purchased would be moved from the inventory of raw material and charged to COGS as an expense.
^ Limitation of internal controls:
a. Collusion: Internal control systems can be overcome if multiple employees collude each other to perform fraud.
b. Incorrect judgment: Internal controls are set up based on professional judgment. Sometimes professional judgment will be wrong or fail to set up an internal control or didn't assign the right task to the right employee.
c. Management override: Someone on the management team who has the authority to do so could override any aspect of a control system for his personal advantage.
d. Missing segregation of duties: A control system might have designed with insufficient segregation of duties so that one person can interfere with its proper operation.
^ Accounting constraint of materiality:
The materiality constraint is a threshold used to determine whether business transactions are important to the financial results of a business. If a transaction is material enough to exceed the constraint threshold, then it is recorded in the financial records and therefore appears in the financial statements.
A larger business will have a higher materiality constraint since its sales level is so much higher than a small entity. A multinational entity might establish a materiality threshold of $1,000,000, while a small local hardware store might have a $1,000 threshold.
^ Characteristics of plant assets that make different from other assets:
a. They are required for use in operations and not for resale.
b. They are long term in nature and usually subject to depreciation.
c. They have physical substance.
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