Chapter 6 Flashcards
The accounting principles associated with merchandise inventory are:
Consistency
Disclosure
Materiality
Accounting conservatism
____ states that a business should use the same accounting methods and procedures from period to period.
consistency principle
___ states that financial statements should report enough information for outsiders to make knowledgeable decisions about the company.
disclosure principle
____ states that a company must perform strictly proper accounting only for items that are significant to the business’s financial situation.
materiality concept
_____ means a business should report the least favorable figures in the financial statements when two or more possible options are presented.
conservatism
ending merchandise inventory formula =
number of units ON HAND * unit cost
cost of goods sold formula:
number of units SOLD * unit cost
____ approximates the flow of inventory costs in a business that is used to determine the amount of cost of goods sold and ending merchandise inventory.
inventory costing method
___ is an inventory costing method based on the specific cost of particular units of inventory.
specific identification method
Used for inventories that include:
Automobiles
Jewels
Real estate
____ assumes the first units purchased are the first to be sold.
FIFO
Cost of Goods Sold is based on the oldest purchases.
Ending Inventory closely reflects current replacement cost.
____ is the total cost spent on inventory that was available to be sold during a period.
cost of goods available for sale
the cost of the newest item in inventory is assigned to each unit as Cost of Goods Sold.
LIFO
____ computes a new weighted-average cost per unit after each purchase
weighted average method
weighted average formula:
cost of goods available for sale / number of units available
Cost of Goods Sold is ____ under L I F O than under F I F O when costs are rising.
higher
Net income is ____ under L I F O than under F I F O when costs are rising
lower
When costs are increasing, F I F O inventory will be the ____, and L I F O inventory will be the _____.
highest, lowest
___ requires that inventory be reported in the financial statements at the lower of the inventory’s historical cost or its market value.
lower of cost or market (LCM) rule
inventory turnover formula =
cost of goods sold / average merchandise inventory
average merchandise inventory formula =
= (beginning merchandise inventory + ending merchandise inventory ) / 2
days’ sales in inventory =
365 days / inventory turnover
