7. Inventory

Question 1

inventory

Answer 1

A tangible resource that is held for resale in the normal course of operations.

Question 2

Examples of items affecting the cost of inventory would include, but is not limited to, the following:

● ________________

● ________________

● ________________

● ________________

● ________________

Answer 2

Examples of items affecting the cost of inventory would include, but is not limited to, the following:

● purchase price

● taxes or duties paid

● cost of shipping and transit insurance

● labour required to assemble the product

● returns to, allowances from the supplier (including purchase discounts).

Question 3

perpetual inventory system

Answer 3

Updates the inventory account each time inventory is bought or sold.

Question 4

periodic (physical) inventory system

Answer 4

Updates the inventory account only at the end of an accounting period.

Question 5

purchases

Answer 5

An account used to accumulate the cost of all purchases.

Question 6

transportation-in

Answer 6

An account that accumulates the transportation costs of obtaining the inventory.

Question 7

purchase returns and allowances

Answer 7

An account that accumulates the cost of all inventory returned to vendors as well as the cost reductions from vendor allowances.

Question 8

To determine the cost of inventory sold, companies can use one of the following four inventory costing methods.

In Australia, AASB 102 does not permit the use of the third method (______); however, this method is used in other parts of the world, primarily Japan and the US:

● ______________

● ______________

● ______________

● ______________

Answer 8

To determine the cost of inventory sold, companies can use one of the following four inventory costing methods.

In Australia, AASB 102 does not permit the use of the third method (LIFO); however, this method is used in other parts of the world, primarily Japan and the US:

● specific identification

● first-in, first-out (FIFO)

● last-in, first-out (LIFO)

● moving average.

Question 9

specific identification method

Answer 9

Determines cost of sales based on the actual cost of each inventory item sold.

Question 10

(FIFO) method

Answer 10

first-in, first-out (FIFO) method

Calculates cost of sales based on the assumption that the first unit of inventory available for sale is the first unit sold.

Question 11

(LIFO) method

Answer 11

last-in, first-out (LIFO) method

Calculates cost of sales based on the assumption that the last unit of inventory available for sale is the first unit sold.

Question 12

moving average method

Answer 12

Calculates cost of sales based on the average unit cost of all inventory available for sale.

Question 13

When a business experiences rising prices for its
inventory, the relative differences will depend on the inventory costing method:

FIFO yields:

ending inventory - ______

cost of sales - ______

LIFO yields:

ending inventory - ______

cost of sales - ______

Answer 13

When a business experiences rising prices for its
inventory, the relative differences will depend on the inventory costing method:

FIFO yields:

ending inventory - highest

cost of sales - lowest

LIFO yields:

ending inventory - lowest

cost of sales - highest

Question 14

retail method

(also known as….)

Answer 14

gross profit (margin) method

A method of estimating the cost of inventory knowing the selling price and reducing it by the gross profit percentage.

Question 15

(LCNRV) rule

Answer 15

lower-of-cost-and-net-realisable-value (LCNRV) rule

Requires inventory to be reported on the balance sheet at its market value if the market value is lower than the inventory’s cost.

Question 16

inventory turnover ratio

Answer 16

Compares cost of sales during a period to the average inventory balance during that period and measures the ability to sell inventory.

Question 17

Key Formula

inventory turnover ratio

Answer 17

Question 18

All other things being equal, a higher inventory turnover ratio indicates that the business sold ______ inventory while maintaining ______ inventory on hand.

Answer 18

All other things being equal, a higher inventory turnover ratio indicates that the business sold more inventory while maintaining less inventory on hand.

Question 19

days-in-inventory ratio

Answer 19

Converts the inventory turnover ratio into a measure of days by dividing the turnover ratio into 365 days.

Question 20

A periodic inventory system does not update the inventory and cost of sales accounts during the period.

When purchases are made, they are recorded in a temporary account called _______.

When sales are made, the resulting _______ (and increase in assets, cash or accounts receivable) is recorded, but not the __________________.

Answer 20

A periodic inventory system does not update the inventory and cost of sales accounts during the period.

When purchases are made, they are recorded in a temporary account called Purchases.

When sales are made, the resulting revenue (and increase in assets, cash or accounts receivable) is recorded, but not the cost of sales (and the decrease in inventory).

Question 21

Purchases account

Answer 21

A temporary account that accumulates the cost of all purchases using the periodic inventory system.

Question 22

Purchase Returns and Allowances account

Answer 22

An account that accumulates the cost of all inventory returned to vendors as well as the cost reductions from vendor allowances.

Question 23

Purchase Discounts account

Answer 23

An account that accumulates the cost reductions generated from vendor discounts granted for prompt payments.

Question 24

Which two accounts increase the cost of inventory?

Answer 24

(1) Purchases account
(2) Transportation-in account

Question 25

Which two accounts reduce the cost of inventory?

Answer 25

(1) The Purchase Returns and Allowances account.
(2) The Purchase Discounts account.

Question 26

net purchases

Answer 26

The value of:

Purchases +

Transportation-in

–

Purchase Returns and Allowances +

Purchase Discounts

Question 27

Key Formula

weighted average unit cost

Answer 27