Chap 1

Question 1

Define Inventory

Answer 1

It’s asset held for sale or goods that will be used or consumed in the production of goods sold

Question 2

What are the 2 major classifications of inventories

Answer 2

• inventories of merchandising business
• inventories of manufacturing business

Question 3

What is the inventory of merchandising business

Answer 3

They are merchandise that were purchased for resale and they’re called merchandise inventories

Question 4

What is the inventory of manufacturing business

Answer 4

They are business that produce physical output

Question 5

What are the 3 types of inventories for manufacturing business

Answer 5

• raw material inventory
• work in process
• finished goods inventory

Question 6

What is ram material inventory

Answer 6

Cost assigned to goods and material on hand but not yet placed in to production

Question 7

What is work in process inventory

Answer 7

Cost of raw material on which production had been started but not completed + direct labor cost and allocated manufacturing overhead cost

Question 8

What is finished goods inventory

Answer 8

Cost identified with the completed but unsold unit on hand at the end of period

Question 9

Why is merchandise purchased and sold the most active elements in merchandising business

Answer 9

1. Sale of merchandise is biggest revenue
2. Cost of those merchandise is the largest deduction from sales
3. Ending inventories are the largest of the current asset

Question 10

What will an error in the determination of the inventory system at the end of the period cause

Answer 10

• an equal misstatement of gross profit and net income
• same incorrect amount for assets and owners equity

Question 11

What the relationship between ending inventory and cost of good sold

Answer 11

Negative
If EI is understated, the CGS will be overstated, vice versa

Question 12

What the relationship between ending inventory and gross profit

Answer 12

Direct or positive
If EI is understated the GP will be understated

Question 13

What the relationship between ending inventory and operating income

Answer 13

Positive
GP and operating income have direct relationship

Question 14

What the relationship between ending inventory and current balance

Answer 14

Positive

Question 15

What the relationship between ending inventory and liabilities

Answer 15

It had no effect

Question 16

What the relationship between ending inventory and owners equity

Answer 16

Positive

Question 17

What the relationship between beginning inventory and CGS

Answer 17

Direct

Question 18

What the relationship between beginning inventory and gross profit

Answer 18

Negative

Question 19

What the relationship between beginning inventory and net income

Answer 19

Negative
Same as gross profit

Question 20

What the relationship between beginning inventory and current asset

Answer 20

No effect on current assets

Question 21

What the relationship between beginning inventory and owners equity

Answer 21

If the error is from previous year then there’s no effect but if it’s from this period it will have an indirect effect

Question 22

What are the 2 types of accounting for inventories

Answer 22

Periodic and perpetual

Question 23

What is periodic inventory system characteristic

Answer 23

• there is no continuous record of merchandise inventory account
• when goods are purchased they are debited to purchase account
• revenue is recorded each time a sale is made
• no entry for CGS
• it’s taken periodically to determine cost of goods on hand and sold
• less costly to maintain
• gives management less info about current status of merchandise

Question 24

What the perpetual system characteristics

Answer 24

• record continuously the amount of inventory
• inventory balance is not the same throughout
• no purchase discount or return
• CGS is recorded at the time of sale
• best when having a diverse and large number of items, it helps keep track