Chapter 5

Question 1

Principle that prescribes the less optimistic estimate when two estimates are about equally likely.

Answer 1

CONSERVATISM CONSTRAINT

Question 2

Receiver of goods owned by another who holds them for purposes of selling them for the owner.

Answer 2

CONSIGNEE

Question 3

Owner of goods who ships them to another party who will sell them for the owner.

Answer 3

CONSIGNOR

Question 4

Principle that prescribes use of the same accounting method(s) over time so that financial statements are comparable across periods.

Answer 4

CONSISTENCY CONCEPT

Question 5

Estimate of number of days needed to convert inventory into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by 365.

Answer 5

DAYS’ SALES IN INVENTORY (a.k.a. DAYS’ STOCK ON HAND)

(ending inventory/cost of goods sold)*365

Question 6

Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.

Answer 6

FIRST-IN, FIRST-OUT (FIFO)

Question 7

Procedure to estimate inventory by using the past gross profit rate to estimate cost of goods sold, which is then subtracted from the cost of goods available for sale.

Answer 7

GROSS PROFIT METHOD

Question 8

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Answer 8

INTERIM STATEMENTS (a.k.a. INTERIM FINANCIAL STATEMENTS)

Question 9

Number of times a company’s average inventory is sold during a period; computed by diving cost of goods sold by average inventory.

Answer 9

INVENTORY TURNOVER (a.k.a. MERCHANDISE TURNOVER)

cost of goods sold/average inventory

Question 10

Method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.

Answer 10

LAST-IN, FIRST-OUT (LIFO)

Question 11

Required method to report inventory at market replacement cost when that market cost is lower than recorded cost.

Answer 11

LOWER OF COST OR MARKET (LCM)

Question 12

Expected selling price (value) of an item minus the cost of making the sale.

Answer 12

NET REALIZABLE VALUE

Question 13

Method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail.

Answer 13

RETAIL INVENTORY METHOD

Question 14

Method for assigning cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of inventory.

Answer 14

SPECIFIC IDENTIFICATION

Question 15

Method for assigning inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale that is then multiplied by the units sold to yield the cost of that sale.

Answer 15

WEIGHTED AVERAGE (a.k.a. AVERAGE COST)

(cost of available units / units available) * units sold

Question 16

Do physical flow and cost flow need to be the same?

Answer 16

NO

Question 17

When purchase costs continue to rise:

• FIFO assigns _______ amt. to COGS;
• LIFO assigns _______ amt to COGS;
• WA yields results ______ FIFO & LIFO; &
• SI yields results that depend on when units are sold.

Answer 17

LOWEST

HIGHEST

BETWEEN

Question 18

Advantage of FIFO:

Amount assigned to _______________ on balance sheet approximates its current cost.

Answer 18

INVENTORY

Question 19

Advantage of LIFO:
Amount assigned to _______________ on income statement approximates its current cost. Better matches ____________ costs with revenues in computing gross profit & allows delay in paying taxes.

Answer 19

COGS

CURRENT

Question 20

Is adjusting entry applied when LCM is lower than recorded cost of inventory?

Answer 20

NO