Chapter 17 - Merchandise Inventory

Question 1

INVENTORY COSTING METHODS

physical inventory

Answer 1

• an actual count of the number of units of each type of good on hand

Question 2

INVENTORY COSTING METHODS

periodic inventory

Answer 2

• inventory based on a periodic count of goods on hand

Question 3

INVENTORY COSTING METHODS

perceptual inventory

Answer 3

• inventory based on a running total of number of units

Question 4

INVENTORY COSTING METHODS

specific identification method

Answer 4

• a method of inventory costing based on the actual cost of each item of inventory
• cost of goods sold is the exact cost of the specified merchandise sold, and the ending inventory balance is the exact cost of the specific inventory items on hand

Question 5

INVENTORY COSTING METHODS

average cost method

Answer 5

• a method of inventory costing using the average cost of units of an item available for sale during the period to arrive at the cost of the ending inventory

Question 6

INVENTORY COSTING METHODS

weighted average method

Answer 6

• it considers the numbers of units in each purchase and the unit purchase price to compute a “weighted average” cost per unit

Question 7

INVENTORY COSTING METHODS

first in, first out (FIFO) method

Answer 7

• a method of inventory costing that assumes the oldest merchandise is sold first

Question 8

INVENTORY COSTING METHODS

last in, first out (LIFO) method

Answer 8

• a method of inventory costing that assumes that the most recently purchased merchandise is sold first

Question 9

INVENTORY VALUATION AND CONTROL

market price or replacement cost

Answer 9

• the price the business would pay to buy an item of inventory through usual channels in usual quantities

Question 10

INVENTORY VALUATION AND CONTROL

lower of cost or market rule

Answer 10

• the principle by which inventory is reported at either its original cost or its replacement cost, whichever is lower

Question 11

INVENTORY VALUATION AND CONTROL

gross profit method

Answer 11

• a method of estimating inventory cost based on the assumption that the rate of gross profit on sales and the ratio of of costs of goods sold to net sales are relatively constant from period to period.
• Step 1 : Estimate the cost of goods sold
• Step 2 : Determine the cost of goods available for sale
• Step 3 : Compute the ending (destroyed) inventory

Question 12

INVENTORY VALUATION AND CONTROL

retail method

Answer 12

• a method of estimating inventory cost by applying the ratio of cost to selling price in the current accounting period to the retail price of the inventory
• Step 1 : List the beginning inventory at both cost and retail
• Step 2 : When merchandise is purchased, record it at cost and determine its retail value
• Step 3 : Compute merchandise available for sale at cost and at retail
• Step 4 : Determine net sales at retail
• Step 5 : Subtract retail sales from the retail merchandise available for sale. The difference is the ending inventory at retail
• Step 6 : Compute the cost ratio
• Step 7 : Multiply the ending inventory at retail by the cost ratio. The result is an estimate of the ending inventory
• Step 8 : Estimate the cost of goods sold by subtracting the ending inventory at cost from the merchandise available for sale at cost

Question 13

INVENTORY VALUATION AND CONTROL

markon

Answer 13

• the difference between the cost and the initial retail price of merchandise

Question 14

INVENTORY VALUATION AND CONTROL

markups

Answer 14

• a price increase above the original markon

Question 15

INVENTORY VALUATION AND CONTROL

markdowns

Answer 15

• price reduction below the original markon

Question 16

INVENTORY COSTING METHODS

Merchandise Inventory account

Answer 16

• appears on both the balance sheet and the income state,net
• often, inventory represents the largest current asset on the balance sheet
• inventory valuation also affects the net income or net loss reported on the income statement
• a higher ending inventory value results in lower costs of goods sold, which results in higher income from operations
• a lower ending inventory value results in a higher cost of goods sold, which results in a lower income from operations
• many firms value merchandise inventory at the original cost of the items on hand
• merchandise inventory in counted at the end of the accounting period; the inventory value is calculated by multiplying the number of units on hand by the cost per item