AC 224 (chapter 6)

Question 1

What is the formula for Gross Profit?

Answer 1

Gross Profit = Sales Revenue - Cost of Goods Sold

Question 2

What is the formula for calculating Ending Inventory?

Answer 2

Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold

Question 3

What does the Income Statement formula represent?

Answer 3

Rev - Exp = Net Inc

Question 4

What is the Balance Sheet equation?

Answer 4

A = L + SE

Question 5

Why is inventory management important?

Answer 5

• Costly to manage and maintain
• Potential for obsolescence
• Reliability of suppliers and ability to procure inventory

Question 6

What is the Just-in-time Inventory Method?

Answer 6

Companies manufacture or produce goods only when needed

Question 7

How is inventory classified for a merchandising company?

Answer 7

Inventory consists of any goods purchased for sale to customers

Question 8

What are the three stages of inventory for a manufacturing company?

Answer 8

• Raw Materials
• Work in Process
• Finished Goods Inventory

Question 9

What are consigned goods?

Answer 9

Companies have inventory on hand that they do not own and are attempting to sell on behalf of another company

Question 10

What are Goods in Transit?

Answer 10

Goods that the company has purchased or sold; inclusion in inventory depends on shipping terms

Question 11

What does the value (cost) of inventory include?

Answer 11

All expenditures necessary to acquire goods and place them in a condition ready for sale

Question 12

What are the four methods of inventory valuation?

Answer 12

• Specific Identification
• First-In, First-Out (FIFO)
• Last-In, First-Out (LIFO)
• Average Cost

Question 13

What is the Specific Identification method?

Answer 13

Each inventory unit is individually identified and reported, reflecting the actual cost of each item sold

Question 14

What does FIFO stand for and what does it assume?

Answer 14

First-In, First-Out; assumes the earliest goods purchased are the first to be sold

Question 15

What is the LIFO method?

Answer 15

Last-In, First-Out; assumes the latest goods purchased are the first to be sold

Question 16

What is the Average Cost method?

Answer 16

Allocates the cost of goods available for sale based on the weighted-average unit cost incurred

Question 17

How does inventory valuation affect financial statements during rising prices?

Answer 17

• FIFO produces higher net income and higher tax liability
• LIFO produces lower net income and lower tax liability
• Average Cost presents COGS and asset valuations between FIFO and LIFO

Question 18

What is the lower-of-cost-or-net realizable value rule?

Answer 18

When the value of inventory is lower than its cost, companies must write down inventory to its net realizable value

Question 19

What is Net Realizable Value?

Answer 19

The net amount that a company expects to realize from the sale of inventory

Question 20

What is Inventory Turnover?

Answer 20

Measures the number of times inventory turns over (is sold) during the year

Question 21

What is the formula for Days in Inventory?

Answer 21

Days in Inventory = 365 / Inventory Turnover

Question 22

What type of company might use the Specific Identification method?

Answer 22

Companies that sell high-cost items of limited variety

Question 23

What type of company might use the FIFO method?

Answer 23

Companies that sell perishable goods or have inventory that is similar in nature

Question 24

What type of company might use the LIFO method?

Answer 24

Companies that benefit from tax advantages during periods of inflation

Question 25

What type of company might use the Average Cost method?

Answer 25

Companies that sell large quantities of similar items