Chapter 6

Question 1

Determination of inventory qualities involves?

Answer 1

Taking physical inventory of goods on hand
Determining ownership of goods

Question 2

What involves in taking a physical inventory ?

Answer 2

• Counting, weighing, measuring each kind of inv on hand
• each count lists quantity of each inventory on summary sheets
• quantity of each good is then multiplied by its unit cost to determine total cost of inv

Question 3

Fob shipping point ownership

Answer 3

Owner ship passes to the buyer in transit and buyer pays shipping costs

Question 4

Fob destination ownership

Answer 4

Ownership transfers when buyer receives the goods and the seller pays shipping costs

Question 5

Goods in transit

Answer 5

• Only include inventory owned by the company
• if destination: goods need to be included in inventory count

Question 6

Consigned goods

Answer 6

• Consigner: owns the goods
• consignee: holding the goods but doesn’t own them
• ex. Consigned sends goods on consignment to the consignee
• ex. Artists send paintings to art galleries on consignment
• artist= consigned
• art gallery = consignee

Question 7

Overview of FIFO (first-in, first-out)

Answer 7

• FIFO rule is applied at the time of each sale
• FIFO assumes earliest goods are sold first
• often reflects the actual physical flow of merchandise

Question 8

Costing (FIFO)

Answer 8

• Cost of oldest goods purchased first are recognized as cogs
• cost of most recents goods purchased are recognized as ending inventory

Question 9

Perpetual FIFO vs. Periodic FIFO

Answer 9

Difference: journal entries
- perpetual records cogs at time of sale while periodic doesn’t

Question 10

FIFO - perpetual

Answer 10

• The seller of goods records entries:
  Debit a/r, credit revenue for goods sale price
  Debit cogs, credits mercy inv for goods cost price

Question 11

Weighted average

Answer 11

• Not practical to measure specific physical flow of inventory
• so, better to use average price for goods available for sale

Question 12

Weighted average is applied when good arre sold

Answer 12

• To units sold to determine cogs
• to units on hand to determine ending inventory

Question 13

Average - perpetual

Answer 13

Total cost / total units = weighted average

Question 14

Periodic - FIFO

Answer 14

Step1: ending inventory
= cogas / units available or sale
Step 2:
= units x unit cost
Step 3: cogs inventory
Cogas - ending inv = cogs

Question 15

Financial statement effects (3)

Answer 15

• income statement effect
• balance sheet effect
• cost formula should be used consistently

Question 16

Income statement effect

Answer 16

• When prices rising, FIFO produces higher profit
• when prices falling, opposite is the

Question 17

Balance sheet effect

Answer 17

FIFO provides the most current valuation of inventory

Question 18

Cost formula should be used consistently

Answer 18

• Enhances comparability of statements overtime
• choose method that best corresponds with actual physical flow

Question 19

Using cost flow methods

Answer 19

• Companies need to use the same cost flow method from period to period
• this enhances comparability of financial statements over time periods
• if company switches methods every change and effects on net income need to be disclosed in financial statements

Question 20

Analysis of inventory

Answer 20

Ratios help determine whether a company has too little or much inventory
(inventory turnover, Days sales in inventory)

Question 21

Inventory turnover ratio

Answer 21

= cogs/average inventory. (Begin inv + end inv ) /2
-# of times inventory gets turned over during period
- The more turnover, the more sales being made

Question 22

Days sales inventory

Answer 22

= Days in a year/ inventory turnover
-# of days on average the inv is getting sold