Chapter 5 - Inventories and Cost of Sales

Question 1

FIFO effect on financial statements

Answer 1

When purchase costs regularly RISE:
- Lowest COG, highest gross profit and net income

When purchase costs regularly DECLINE:
- Highest COGS, lowest gross profit and net income

Question 2

LIFO effect on financial statements

Answer 2

When purchase costs regularly RISE:
- Highest COGS, lowest gross profit and net income

When purchase costs regularly DECLINE:
- Lowest COGS, highest gross profit and income

Question 3

Weighted average effect on financial statements

Answer 3

Results between FIFO and LIFO

Question 4

Specific identification effect on financial statements

Answer 4

Results depend on which units are sold

Question 5

Inventory safeguards

Answer 5

• Restricted access
• Authorized requisitions
• Security measures
• Controlled environments
• Insure inventory against loss or damage

Question 6

LCM

Answer 6

Lower of cost or market

Requires that inventory be reported at the market value (cost) of replacing inventory when markets value is lower than cost.

Question 7

Steps to apply LCM

Answer 7

1. List number of units for each product
2. List the cost of each item
3. List the market price of each item
4. Compute total cost and total market value for each item
5. Compare recorded cost with replacement cost, list lower of cost or market
6. Adjust inventory downward when market is less than cost

Question 8

Inventory turnover ratio

Answer 8

Cost of goods sold / average inventory

Question 9

Days’ Sales in Inventory ratio

Answer 9

Ending inventory/ Cost of Goods sold x 365

Question 10

Goods in transit

Answer 10

To determine what goods to include in inventory, review shipping terms.

FOB Ship Point - Included
FOB Destination - Not included until arrived at destination

Question 11

Consignor

Answer 11

Owner of the goods, reports them in inventory until sold.

Question 12

Consignee

Answer 12

Sells goods for the owner, does not include own inventory.

Question 13

Cost Flow Assumptions

Answer 13

1. FIFO
2. LIFO
3. Weighted Average
4. Specific Identification

Question 14

Cost of Goods Available for Sale

Answer 14

The total price for all goods (units) acquired.

Equals Cost of Goods Sold (units sold) + Ending Inventory Balance (units left)

Question 15

Internal controls guidelines

Answer 15

1. Handling of cash is separate from record keeping
2. Cash receipts are promptly deposited in a bank
3. Cash disbursements are made by check or EFT

Question 16

Cash equivalent

Answer 16

Short term highly liquid investments. Can be liquified in 90 days.

Question 17

Cash

Answer 17

Currency, coins, deposits in bank account, checking accounts, savings accounts.

Question 18

Goals of Cash Management

Answer 18

1. Plan recipes to meet cash payments when due

2. Keep a minimum level of cash necessary to operate

Question 19

Principles of Internal Controls

Answer 19

1. Establish responsibility
2. Maintain adequate records
3. Insure assets
4. Separate record keeping from custody of assets
5. Divide responsibility for related transactions
6. Apply technological controls
7. Perform regularly and independent reviews