22.1-22.5 Inventories

Question 1

LIFO reserve is …

Answer 1

The difference between the reported LIFO inventory carrying amount and the inventory amount that would have been reported if the FIFO method had been used.

**The FIFO inventory value less the LIFO inventory value.

Question 1

Periodic inventory system - …

Perpetual inventory system - …

Answer 1

Periodic - inventory values and costs of sales are determined at the end of an accounting period. Purchases are recorded in a purchases account.

Perpetual - inventory values and cost of sales are continuously updated to reflect purchases and sales.

Question 2

To compare companies using LIFO with companies not using LIFO (3 steps):

Answer 2

• Inventory is adjusted by adding the disclosed LIFO reserve to the inventory balance that is reported on the balance sheet.
• The reported inventory balance, using LIFO, plus the LIFO reserve equals the inventory that would have been reported under FIFO.
• Cost of sales is adjusted by subtracting the increase in the LIFO reserve during the period from the cost of sales amount that is reported on the income statement.

Question 3

• Inventory turnover - an activity ratio calculated as …

Answer 3

Cost of goods sold divided by average inventory.

Question 4

• Days of inventory on hand - an activity ratio equal to …

Answer 4

The number of days in the period divided by inventory turnover over the period.