ACCT 312 7.1

Question 1

What are inventories?

Answer 1

Asset items that a company holds for sale in the ordinary course of business. Current asset.

Question 2

Merchandising inventory

Answer 2

Inventory held by merchandising or retail stores that is listed at the price that it cost. Only one inventory account.

Question 3

What are the three accounts that a manufacturing company would have for inventory?

Answer 3

Raw Materials Inventory, Work in Process Inventory, and Finished Goods Inventory

Question 4

What’s different about a merchandising company’s BS vs. a manufacturing company’s BS?

Answer 4

A manufacturing company’s balance sheet has the raw materials, work in process, and finished goods separated and added up to equal total inventories while the merchandising company just has inventories as one account.

Question 5

Factory supplies inventory account

Answer 5

Account that a manufacturing company could have that isn’t directly under total inventories because it’s not a direct material to the product so it doesn’t qualify as raw materials.

Question 6

What is the flow of costs through a merchandising and manufacturing company?

Answer 6

Check 7.1 on one note

Question 7

What type of account is inventory on hand?

Answer 7

Asset

Question 8

Inventory Cost Flow Process

Answer 8

Question 9

Cost of Goods Sold Equation

Answer 9

Beginning Inventory
+ Cost of goods purchased (throughout year)
—————————————————————-
Cost of Goods Available for Sale
- Ending Inventory
———————————————————-
Cost of Goods Sold

Question 10

Periodic vs Perpetual System (and how it would affect inventory)

Answer 10

Periodic is only reported at the end of the period so inventory would not be entered in the journal entries until the end of the period, whereas in perpetual inventory is consistently updated in the journal entries when a purchase or sale is made.

Question 11

How often should companies consistently count inventory on hand?

Answer 11

At least once a year.

Question 12

Why is Inventory Control reported atleast once a year

Answer 12

To properly report inventory quantities in their annual accounting reports

Question 13

When does a company recognize an asset or inventory

Answer 13

At the time it controls the asset (passage of title)

Question 14

What are Consigned goods?

Answer 14

Goods that an owner gives to another party to sell for him while still owning the title of the item. Therefore, the consignee will make no entry to their inventory account for goods received.

Question 15

Product vs. Period Costs

Answer 15

Both costs are included in inventory. Period costs are generally selling, general, and administrative expenses. Product Costs are directly connected with bringing the goods to the buyer’s place of business and converting to salable condition.

Question 16

Special Sales Agreement

Answer 16

Often called a repurchase agreement or a “parking transaction”. Usually involves a transfer with either implicit or explicit repurchase agreement.

Question 17

When should you use specific identification method cost flow method?

Answer 17

When handling a relatively small number of costly, easily distinguishable items

Question 18

Why would a company use LIFO?

Answer 18

For tax and external financial reporting purposes

Question 19

Why would a company use FIFO?

Answer 19

Internal reporting purposes.

Question 20

What is LIFO Reserve?

Answer 20

The difference between the inventory method used for internal reporting purposes and LIFO

Question 21

What is LIFO liquidation?

Answer 21

What happens when the specific-goods approach is used to a LIFO inventory. It causes erosion of the inventory which distorts net income and leads to substantial tax payments.

Question 22

What is Dollar-Value LIFO?

Answer 22

When a LIFO inventory is measured in terms of a total dollar value, not physical quantity of goods.
Advantage:
* Broader range of goods in pool
* Permits replacement of goods that are similar * Helps protect LIFO layers from erosion

Question 23

What price index do most company use?

Answer 23

The one the fed gov posts each month and/or Consumer Price Index for Urban Consumers (CPI-U)

Question 24

Price index for current year equation

Answer 24

Ending Inventory for the Period at Current cost/
Ending Inventory for the Period at Base-Year Cost
=
Price Index for Current Year

Question 25

Advantages of LIFO?

Answer 25

• Matching
• Tax Benefits/Improved Tax Flow
• Future Earnings Hedge

Question 26

Disadvantages of LIFO?

Answer 26

• Reduced earnings
• Inventory Understated
• Physical Flow
• Involuntary Liquidation/Poor Buying Habits

Question 27

LIFO is preferred:

Answer 27

1. If selling prices and revenues are increasing faster than
   costs and
2. If a company has a fairly constant “base stock.”

Question 28

LIFO is not preferred

Answer 28

1. Where prices tend to lag behind costs.
2. If specific identification is traditionally used.
3. Where unit costs tend to decrease as production increases.