Chapter 2: Inventory

Question 1

physical goods consist of

Answer 1

1. inventory on hand
2. units in transport
3. submitted goods

Question 2

gross profit margin

Answer 2

percentage of sales that actually results in profit

Question 3

freight costs

Answer 3

costs to transport goods to the buying company, which is paid by the buyer

Question 4

specific identification method

Answer 4

costing inventory at the specific cost of an individual product –> very expensive

Question 5

comparability principle

Answer 5

a company uses the same bookkeeping method each year –> this makes it possible for investors and other interested parties to compare the results over time

Question 6

net realizable value

Answer 6

estimated cost price in the ordinary course of business - the estimated costs of completion and the estimated costs necessary to make the sale

Question 7

lower-of-cost-or-net-realizable-value

Answer 7

choose lowest between (FIFO, LIFO or average) and NRV –> required as an entity is not able to recover costs if products are damaged or when the selling price is decreased below the cost price

Question 8

inventory turnover

Answer 8

how many times a company has replaced its inventory during a period

Question 9

inventory resident period

Answer 9

the number of days that inventory on average stays in the warehouse