Chapter 6

Question 1

Describe Inventory

Answer 1

• A current asset on the balance sheet
• less liquid than cash
• valued at the lower of cost & market

Question 2

Depending on the industry, Inventory can consist of

Answer 2

• Goods purchased for resale
• raw materials, work in process, finished goods
• other

Question 3

What is the importance of determining physical inventory

Answer 3

• whether companies use a periodic or perpetual system, physical inventory must still be counted at the end of the period
• this will help identify accuracy of the perpetual system (if used), shrinkage due to theft, spoilage, etc.

Question 4

Describe FOB shipping point

Answer 4

Buyer pays to get the goods to the destination (so buyer owns it at the shipping point)

Question 5

Describe FOB destination

Answer 5

Seller pays to get the goods to the destination (so buyer owns it at destination)

Question 6

Describe the ownership of consigned goods

Answer 6

This remains with the owner, no the holder of the goods (consigned goods are where your goods are on someone else’s shelf but you still own those goods, when those goods sell you get a portion of the sales)

Question 7

Describe Specific Identification (SI) method of inventory cost flow

Answer 7

• Can only be used when each inventory item is easily distinguishable (not like in a grocery store where all the corn flakes would be the same)
• Used in perpetual system only*

Question 8

Describe First In First Out (FIFO) inventory cost flow method

Answer 8

• First item purchased is the first item sold (ex. dairy at grocery store)
• Ending inventory is the same for perpetual and periodic systems (so the type of system does not make a difference)

Question 9

Describe the Average (Weighted Average) inventory cost flow method

Answer 9

• A new weighed average is calculated after each purchase and used to record COGS and ending inventory

–> so each time you make a purchase under perpetual you will use that to record COGS

• Under periodic you do it monthly or when you do a count

Question 10

How can you calculate COGS

Answer 10

Opening Balance + purchases - ending balance = COGS

Question 11

How do you get gross profit

Answer 11

Sales - COGS = gross profit

Question 12

Describe calculating FIFO under periodic/perpetual system

Answer 12

No difference - same result regardless of method

Question 13

Describe calculating the average cost under periodic/perpetual system

Answer 13

• Under perpetual system you can use the table
• Under periodic you need to get the COGAS which you can get from the FIFO table and go from there

Question 14

Describe Lower of Cost and Net Realizable value (LCNRV)

Answer 14

• When the value of the inventory declines below net realizable value, it is written down to its net realizable value
• NRV is the selling price less any costs necessary to make the goods ready for sale
• this is a departure from the historical cost principle
• Should be done on an item by item basis

–> you reduce inventory by crediting it for the amount of write down, debit is to COGS
–> Reverse write down if value subsequently recovers

Question 15

Describe the inventory turnover ratio

Answer 15

• This indicates the number of times that a company sells or turns over its inventory each year
• HIGHER is better then lower

Question 16

Describe the days in inventory

Answer 16

• days in inventory indicates the average period required to sell an item of inventory
• LOWER is better than higher