Chapter 6

Question 1

The company purchased the inventory at $200 on
July 1, 2019. The market value of the inventory is
assessed to be $400 on the fiscal-year end date on
December 31, 2019. What should be the amount of
the inventory reported on the balance sheet as at
December 31, 2019?

Answer 1

We choose market value price which is 200

Question 2

What is net realizable value?

Answer 2

Expected selling price - sum of selling costs and costs to complete. It is the estimated retail market value of inventory

Question 3

What events change value of inventory?

Answer 3

• Lower sale price

- additional costs to sell

Question 4

What is a fire sale?

Answer 4

Selling goods or assets at heavily discounted prices. (Normally when seller is in financial distress)

Question 5

What is lower of cost of NRV?

Answer 5

Concept that inventory should be reported at the lower of its costs or the amount at which it can be sold (market value)

Question 6

Direct write down method of inventory?

Answer 6

(Dr) COGS (Cr) Inventory

Question 7

Indirect write down method of inventory?

Answer 7

(Dr) Loss due to market decline

(Cr) Inventory

Question 8

Equation for inventory?

Answer 8

Ending inventory = beginning inventory + purchase - COGS

Question 9

The requirement to use lower cost or market (LCM) rule is a result of the application of which account principle?

Answer 9

Conservatism principle

Question 10

Equation for cost of goods available

Answer 10

Beginning inventory + purchase

Question 11

How to compute estimated value of inventory stolen with periodic inventory system?

Answer 11

Find ending inventory and this is your answer

Question 12

Equation for inventory turnover?

Answer 12

COGS/average inventory

number of times inventory is renewed each year

Question 13

Equation for inventory turnover in 365 days?

Answer 13

365/inventory turnover ratio

number of days it takes to renew inventory

Question 14

Do you want a long or short days in inventory?

Answer 14

Shorter the better but must have inventory on the shelves to sell it

Question 15

When do you not need an average value on B/S items for financial ratios?

Answer 15

If the denominator and numerator come from the same financial statement

Question 16

What is FIFO?

Answer 16

Assumption that the first item purchased is the first item sold during the year

Question 17

What is the average cost method?

Answer 17

Take the average value to determine inventory cost during the year

Question 18

Journal entry when specific item is sold?

Answer 18

(Dr) Cash, COGS - itemA

(Cr) Sales revenue, Inventory - item A

Question 19

What is the specific identification method?

Answer 19

If invenotry items are unique then company will likely track cost of each item in inventory as cost for each item is different

Question 20

Can a company use multiple cost flow assumptions for different product groups of the firm?

Answer 20

Yes

Question 21

At the beginning of 2022, Movie Studio plans to make
three movies in 2022. The total costs for the three movies are expected to be $555 million. So the average cost per movie is estimated to be $185 million. As a CEO, would you sell one movie for $190 million?

Answer 21

No. Because each film is unique, we need to keep track of the costs separately for decision-making. We should not use the average value of the total costs when the product is unique

Question 22

Assumption in FIFO?

Answer 22

Firs unit sold is the first unit that was purchased

Question 23

In FIFO what is the COGS?

Answer 23

Cost of the units purchased first

Question 24

In FIFO what is the year-end inventory?

Answer 24

Cost of the units purchased last

Question 25

If costs are increasing over time, FIFO gives higher or lower net income under the assumption that all else is equal (including total purchase price of the inventory during the year), compared to the case when costs are decreasing?

Answer 25

In order to have higher net income we need a smaller COGS expense. Inflation case will give us smaller COGS expense relative to deflation case. So smaller COGS expense gives higher net income so the answer is higher.

Question 26

If costs are rising, FIFO gives?

Answer 26

Lower COGS
Higher gross margin
Higher net income
Higher ending inventory

Question 27

How to calculate average cost method under perpetual system?

Answer 27

When a sale occurs, the average unit cost at that point us used in order to calculate COGS

average cost per unit = units of inventory remaining * cost / units of inventory
COGS = units sold * average cost per unit

Question 28

Assume that a company adopts the perpetual inventory system. If costs are rising, average cost method gives higher or lower net income, compared to FIFO?

Answer 28

Lower. In FIFO the oldest purchase are the ones we’ve sold so they must be cheaper because of inflation. When inventory is sold they are cheaper than purchased so COGS wil be smaller so FIFO has a higher net income

Question 29

Most recent purchases will be more expensive in case of inflation so for FIFO ending inventory balance will be higher. What is true about the current ratio of the corporations?

Answer 29

Most recent purchases will be more expensive in case of inflation so for FIFO ending inventory balance will be higher. So current ratio of A is larger than current ratio of B

Question 30

Is cash higher in FIFO or average cost?

Answer 30

They are the same

Question 31

Is Ending inventory higher in FIFO or average cost?

Answer 31

FIFO

Question 32

Is retained earnings higher in FIFO or average cost?

Answer 32

FIFO

Question 33

How to calculate average cost under periodic system?

Answer 33

Ending inventory is remaining units of inventory * (weighted average unit cost)

Cost of goods available for sale = beginning inventory + purchased

COGS = beginning inventory + purchased - ending inventory

Weighted average unit cost = COG available for sale / total units availabble for sale)

Question 34

If all else is equal, which inventory system gives higher net income
under the assumption that the costs are rising over time?

Answer 34

Perpetual

With perpetual we look at moving average and periodic we look at weighted average. If we assume inflation then perpetual. (Would be opposite if assuming deflation)