Chapter 6

Question 1

Three categories of inventory

Answer 1

Finished goods inventory

Work in process

Raw materials

Question 2

Finished goods inventory

Answer 2

Manufactured items that are completed and ready for sale

Question 3

Work in process

Answer 3

The portion of manufactured inventory that has begun the production process but is not yet complete

Question 4

Raw materials

Answer 4

The baic goods that will be used in production but have not yet been placed into production

Question 5

Hepful hint: inventory classification

Answer 5

Regardless of the classification, companies report all inventories under Current Assets on the balance sheet

Question 6

Just-in-time (JIT) inventory

Answer 6

Companies manufacture or purchase goods just in time for use

ex. Dell

Question 7

Ethics note: salad oil company

Answer 7

Filled storage tanks with water so auditors thought they were full of oil

repainted numbers too

Question 8

Ownership during FOB shipping point

Answer 8

ownership passes to the buyer when the public carrier accepts the goods from the seller

• buyer pays freight costs

Question 9

Ownership during FOB destination

Answer 9

Ownership remains with the seller until thegoods reach the buyer

seller pays freight costs

Question 10

Consigned goods

Answer 10

Goods held for sale by one party although ownership of the goods is retained by another party

ex. a company is selling my car for a fee

Question 11

Ethic Note: disadvantage of specific identification

Answer 11

Management can manipulate net income

Boost net income by selling units bought at low cost

or reduce by selling units bought at high cost

Question 12

Specific identification

Answer 12

An actual physical flow costing method in which items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory

Question 13

First in, First out (FIFO) method

Answer 13

An inventory costing method that assumes that the earliest goods purchased are the first to be sold

Question 14

Helpful hint: FIFO

Answer 14

Another way of thinking about FIFO ending inventory is the LISH assumption

“Last is still here”

Question 15

LIFO

Answer 15

An inventory costin gmethod that assumes the latest units purchased are the first to be sold

alternative: FISH “First is still here”

Question 16

Average-cost method

Answer 16

An inventory costing method that uses weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold

COGS/Total Units Avilable for Sale = Weight Average Unit Cost

Question 17

Companies can use _________________ under GAAP

Answer 17

all three assumed cost flow methods

Question 18

REasons for different inventory cost flow methods

Answer 18

1. Income statement effects
2. Balance sheet effects
3. Tax effects

Question 19

When prices are rising, companies prefer ______________

Answer 19

FIFO because it results in higher net income

Question 20

Helpful hint: LIFO and taxes

Answer 20

LIFO conformity

If companies use LIFO for taxe purposesm they must also use it for financial purposes

Question 21

LIFO _____________ the quality of earnings ratio

Answer 21

increases

higher net cash from operating activities

lower net income

Question 22

Lower-of-cost-or-market

Answer 22

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost

Question 23

Current replacement cost

Answer 23

The cost of purchasing the same goods at the present time form the usual suppliers in the usual quantities

Question 24

Concept of conservitism

Answer 24

The best choice among accounting alternatives is the method that is least likely to overstate assets and net income

Question 25

International Note: write-downs

Answer 25

Under GAAP - companies cannot reverse inventory write-downs if inventory increases in value in subsequent periods

IFRS - permits companies to reverse write-downs in some circumstances

Question 26

Inventory turnover ratio

Answer 26

Cost of Goods Sold

Average Inventory

*Indicates how quickly a company sells its goods

Question 27

Days in inventory

Answer 27

365

Inventory Turnover Ratio

*indicates the average number of days inventory is held

Question 28

LIFO reserve

Answer 28

For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO

Question 29

Moving average method

Answer 29

Company computes a new average after each purchase for unit costs

Question 30

Beginning inventory understated

Answer 30

Cost of goods sold: understated

Net income: overstated

Question 31

Beginning inventory overstated

Answer 31

Cost of Goods Sold: Overstated

Net income: Understated

Question 32

Ending inventory understated

Answer 32

Cost of Goods Sold: Overstated

Net income: Understated

Question 33

Ending inventory overstated

Answer 33

Cost of Goods Sold: Understated

Net income: Overstated

Question 34

Ending inventory error: Overstated

Answer 34

Assets: Overstated

Liabilities: No effect

Stockholder’s equity: overstated

Question 35

Ending inventory error: Understated

Answer 35

Assets: Understated

Liabilities: No effect

Stockholders’ Equity: Understated