Accounting 6

Question 1

Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system

Answer 1

the primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes a cost of being inventory and cost of goods purchased. The inventory cost flow methods are specific identification and 3 assume cost flow methos -FIFO, LIFO, and average-cost

Question 2

Explain the financial statement and tax effects of each of the inventory cost cost flow assumptions

Answer 2

The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow.When prices are rising, the FIFO method results in lower cost of gods sold and higher net income than the average cost and the LIFO methods. The reverse is true when prices are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, whereas the inventory under LIFO is the farthest from current value. LIFO results in the lowest income tax (b/c of lower taxable income)

Question 3

Explain the lower of cost or market basis of accounting for inventories

Answer 3

Companies use the lower of cost or market (LCM) basis when the current replacement cost(market) is less than cost. Under LCM, companies recognize the loss in the period in which the price decline occurs.

Question 4

Compute and interpret the inventory turnover

Answer 4

Inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover. A higher inventory or lower average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level.

Question 5

Describe the LIFO reserve and explain its importance for comparing results of different companies

Answer 5

The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies this difference can be significant, and ignoring it can lead to inappropriate conclusions when using the current ration or inventory turnover.

Question 6

When should the inventory costing method be used? What information do you need to know to make this decision? Where will you get this information?

Answer 6

1) It depends on the objective. In a period of rising prices, income and inventory are higher and cash flow is lower under FIFO. LIFO provides opposite results. Average cost can moderate the impact of changing prices
2) Are prices increasing or decreasing?
3) Income statement, balance sheet, and tax effects

Question 7

How long is an item in inventory? What information do you need to make the decision? What are the formulas that you will need to use?

Answer 7

1)A higher inventory turnover or lower average days in inventory suggests that management is reducing the amount of inventory on hand, relative to cost of goods sold.
2)cost of goods sold; beginning and end inventory
3) Inventory turnover=(cost of goods sold/ average inventory)
days in inventory=(365 days/ inventory turnover)

Question 8

What is the impact of LIFO on the company’s reported inventory? What info do you need to make a decision? What formula will you have to use?

Answer 8

1) If these adjustments are material, they can significantly affect such measures as the current ratio and the inventory turnover
2) LIFO reserve, cost of goods sold, ending inventory, current assets, current liabilities
3) LIFO inventory+LIFO reserve= LIFO inventory

Question 9

Average cost method

Answer 9

an inventory costing method that uses the weighted- average unit cost to allocate the cost of goods available for sale to ending inventory and sot of goods sold

Question 10

Consigned goods

Answer 10

goods held for sale by one party although ownership of the goods is retained by another party

Question 11

Current replacement cost

Answer 11

the cost of purchasing the same goods at the present time from the usual suppliers in the usual qualities

Question 12

Days in inventory

Answer 12

measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover

Question 13

Finished goods inventory

Answer 13

manufactured items that are completed and ready for sale

Question 14

FIFO

Answer 14

an inventory costing method that assumes that the earliest goods purchased are the first to be sold

Question 15

FOB destination

Answer 15

Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer

Question 16

FOB shipping point

Answer 16

freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller

Question 17

Inventory turnover

Answer 17

a ratio that indicates the liquidity by measuring the # of times average inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period

Question 18

Just-in-time (JIT) inventory

Answer 18

inventory system in which companies manufacture or purchase goods just in time for use

Question 19

LIFO

Answer 19

an inventory costing method that assumes that the latest units purchased are the first to be sold

Question 20

LIFO reserve

Answer 20

for a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO

Question 21

Lower-of-cost-or-market (LCM)

Answer 21

a basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost

Question 22

Raw materials

Answer 22

basic goods that will be used in production but have not yet been placed in production

Question 23

Specific identification method

Answer 23

an actual physical-flow costing method in which particular items sold and items still in inventory are specifically costed to arrive are cost of goods sold and ending inventory

Question 24

weighted-average unit cost

Answer 24

average cost that is weighted by the number of units purchased at each unit cost

Question 25

work in progress

Answer 25

the proportion of manufactured inventory that had begun the production process but is not yet complete

Question 26

When is a physical inventory usually taken?

Answer 26

• when a limited number of goods are being sold or received

- at the end of the company’s fiscal year

Question 27

What are 2 important items that should be included in the physical inventory of a company

Answer 27

• goods shipped on consignment to another company

- goods in transit from another company shipped FOB shipping point

Question 28

As a result of a thorough physical inventory, Railway Company determined that it had inventory worth $180,000 at Dec 31,2014. This count did not take consideration the following facts; Rogers Consignment store currently has goods worth $35,000 on its floor that belong to Railway, but are being sold on consignment by Rogers. The selling price of these goods is $50,000. Railway purchased $13,000 of goods that were shipped on Dec 27, FOB destination, that will be received by Railway on JAnuary 3. Determine th correct amount of inventory that Railway should report.

Answer 28

$215,000

(180,000+35,000)=$215,000

Question 29

Kam Company has the following units and cost
Units Unit Cost
Inventory, Jan 1 8,000 $11
Purchased, June 19 13,000 $12
Purchased, Nov 8 5,000 $13
If 9,000 units ar on hand at Dec 31, what is the cost of the ending inventory under FIFO?

Answer 29

$113,000

((5,000x$13)+(4,000x$12))=$113,000

Question 30

Kam Company has the following units and cost
Units Unit Cost
Inventory, Jan 1 8,000 $11
Purchased, June 19 13,000 $12
Purchased, Nov 8 5,000 $13
What is the cost of the ending inventory under LIFO?

Answer 30

$100,000

((8,000x$11)+(1,000x$12))=$100,000

Question 31

Davidson Electronics has the following
Units Unit Cost
Inventory Jan1 5,000 $8
Purchase April2 15,000 $10
Purchase Aug 28 20,000 $12
If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the average-cost method is

Answer 31

$75,250
((5,000x$8)+(15,000X$10)+(20,000x$12))/ 40,000= $10.75;

$10.75x7,000=$75,250

Question 32

In periods of rising prices, LIFO will produce

Answer 32

lower net income that FIFO

Question 33

Considerations that affect the selection of an inventory costing method include

Answer 33

• tax effects
• balance sheet effects
• income statement effects

Question 34

The lower-of-cost-or-market rule for inventory is an example fo the application of

Answer 34

the conservatism convention

Question 35

What would cause inventory turnover to increase the most

Answer 35

decreasing the amount of inventory on hand and increasing sales

Question 36

Carlos Company had 
beginning inventory $80,000 
ending inventory $110,000
cost of goods sold $285,000
Sales $475,000
Carlos's days in inventory is?

Answer 36

121.7 days

($285,000/ (($80,000+$110,000)/2)=3
365/3= 121.7 days

Question 37

The LIFO reserve is

Answer 37

the difference between the value of the inventory under LIFO and the value under FIFO

Question 38

In a perpetual inventory system

Answer 38

FIFO cost of goods sold will be the same as in periodic inventory system

Question 39

Fran Company’s ending inventory is understated by $4,000. The effects of this error on the current year’s cost of goods sold an net income, respectively, are:

Answer 39

cost of goods sold-overstated

net income-understated

Question 40

Harold Company overstated its inventory by $15,000 at Dec 31, 2014. It did not correct the error in 2014 or 2015. As a result, Harold’s stockholders’ equity was:

Answer 40

-overstated at Dec 31,2014 and properly stated at Dec 31, 2015

Question 41

How do you classify inventory and inventory qualities as a merchandiser and manufacturer

Answer 41

• Merchandisers: 1)merchandise inventory; which describe the different items making up inventory
• Manufacturers: 1)finished goods 2)work in progress 3)raw materials; determine inventory qualities by 1)taking a physical inventory of goods on hand 2)determine ownership of goods in transit or on consignment