Chapter 6 Flashcards
What aspects of accounting for inventory on financial statements would be of interest to accountants?
That inventory isn’t obsolete, is properly counted and valued consistently each year.
What is meant by the laid-down cost of inventory?
Laid-down cost of inventory includes purchase discounts, transportation-in, and insurance while in transit to prepare for sale.
How does a flow of goods differ from a flow of costs? Do generally accepted accounting principles require that the flow of costs be similar to the movement of goods? Explain.
Flow of goods is the physical movement, while flow of costs involves cost methods like FIFO. Specific Identification
What two factors are considered when costing merchandise for financial statement purposes? Which of these factors is most difficult to determine? Why?
Quantity and assigned value per unit. Assigning the value is more difficult because it involves tracking down the laid-down cost of many items.
Explain the importance of maintaining appropriate inventory levels for management and investors and creditor
Inventory is important to management to ensure customer orders are met. Also, Investors and creditors assess inventory levels to determine the financial strength and compare trends.
Why is consistency in inventory valuation necessary? Does the application of the consistency principle preclude a change from weighted average to FIFO? Explain.
Consistency in inventory costing allows performance comparison. Changes in valuation method require restating prior years.
The ending inventory of CBCA Inc. is overstated by $5,000 at December 31, 2018. What is the effect on 2018 net income? What is the effect on 2019 net income assuming that no other inventory errors have occurred during 2019?
Overstated ending inventory in 2018 leads to overstated net income, in 2019 the net income would be understated by 5000.
When should inventory be valued at less than cost?
Inventory is valued at less than cost due to deterioration, obsolescence, or price changes.
What is the primary reason for the use of the LCNRV method of inventory valuation? What does the term net realisable value mean?
LCNRV prevents overstatement if inventory value drops below cost. Net realizable value is selling price minus sale costs.
When inventory is valued at LCNRV, what does cost refer to?
LCNRV cost refers to laid-down cost.
Why is estimating inventory useful?
Estimating inventory helps with Inventory control and Interim financial statements by providing cost-effective inventory estimates.
What inventory cost flow assumptions are permissible under GAAP?
GAAP allows specific identification, FIFO, or average cost.
How does the estimation of ending inventory differ between the gross profit method and the retail inventory method? Use examples to illustrate.
Gross profit method uses consistent profit percentage to estimate cost of goods sold and ending inventory while the Retail inventory method uses constant markup to value goods at retail, then calculates cost using cost percentage.
When is the use of the gross profit method particularly useful?
Gross profit method is useful for estimating inventory in cases of theft or fire when physical counts are impossible.
Does the retail inventory method assume any particular inventory cost flow assumption?
Retail inventory method assumes average cost flow due to constant markup for the ending inventory and cost of goods sold calculation.
