ch.5

Question 1

FOB shipping point, the BLANK is responsible for paying freight charges and the BLANK will not include the merchandise in their inventory

Answer 1

Purchaser
Seller

Question 2

Which of the costs below would be included in the recorded cost of merchandise inventory?

Answer 2

insurance Cost
Storage Cost
Invoice cost

Question 3

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory?

Answer 3

COGS + ending inventory = total goods available for sale
COGS available for sale must be allocated between COGS and ending inventory

Question 4

Explain what lower of cost or market means in regards to reporting merchandise inventory on the balance sheet.

Answer 4

Inventory should be reported at the current market value of replacing it when lower than cost.

Question 5

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory?

Answer 5

Cost of goods sold plus ending inventory will equal the total goods available for sale.

Cost of goods available for sale must be allocated between cost of goods sold and ending inventory.

Question 6

Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding

Answer 6

Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.

Companies using FIFO will report the smallest cost of goods sold.

Companies using FIFO will report the highest gross profit and net income.

Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal.

Question 7

Which of the statements below explain why LCM is used?

Answer 7

Assets are not shown at an inflated value on the balance sheet, but rather at lower of cost or replacement cost.

Companies cannot report inventory on a balance sheet that is higher than replacement cost.

LCM allows companies to recognize a loss in value of an asset in the period the loss occurs.

Question 8

Place steps that apply LCM to individual items of inventory.

Answer 8

1. List # of units of each product
2. List the cost of each item
3. List the mkt price of each item
4. Compute total cost and total mkt value for each item
5. Compare recorded cost of each inventory item w. its replacement cost. List lower of cost or mkt
6. Adjust inventory downward when mkt is less than cost

Question 9

Which of the following statements correctly explains what the inventory turnover ratio assesses.

Answer 9

The inventory turnover ratio assesses whether management is doing a good job controlling the amount of inventory.

Question 10

When ending inventory is understated on the balance sheet, the current year’s income statement is

Answer 10

The current year’s cost of goods sold will be too high.

The current year’s net income will be too low.

Question 11

Inventory turnover= COGS/ avg. inventory