C. INVENTORY 03

Question 1

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Specific identification:

Answer 1

Specific identification: This is used with large items such as cars where each item has an individual cost.

Question 2

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Perpetual inventory system

Answer 2

A perpetual system records the purchases and sales of inventory items as they occur. In other words a computer system that tracks inventory moving in and out. Physical counts still take place to verify the inventory.

Question 3

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LIFO liquidation

Answer 3

LIFO liquidation is when the oldest layer of cost is reduced because more units were sold in the current year than purchased, which taps into the older “layers” of inventory.

Question 4

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Dollar Value LIFO

Answer 4

Dollar Value LIFO

This is using LIFO ‘pools’ to track inventory.

Main point is that this uses a “conversion index” to determine inventory value for the LIFO layer added in the current year.

Conversion index is:

Ending inventory in current year dollars / ending inventory in base year dollars.

Then, you use that multiplier to convert current year prices to base year prices.

Question 5

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Gross margin method

Answer 5

Gross margin method

This is used to estimate COGS using gross margin

• Sales - cost = margin
• 100 - 70 = margin of 30

Then you know that COGS is 70% of sales, and margin is 30%
You can use this to figure out these margin problems

Question 6

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Retail Inventory Method

Answer 6

Retail Inventory Method

This is used by retailers to estimate the cost of ending inventory.
Basic steps:

• Calculate ending inventory at retail prices
• Calculate the cost to retail ratio
• Apply cost to retail ratio to ending inventory at retail prices to get ending inventory at cost

Question 7

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Inventory errors

Answer 7

Inventory errors

These are problems where they’ll say something like “purchases were overstated, what was the effect?”

You will see some of these on the test, the best approach is to write out the inventory equation and walk through the info in the question.

Inventory equation:

Beginning inventory

ADD: Purchases

EQUALS: Goods available for sale

LESS: Ending inventory

EQUALS: Cost of goods sold