chapter 6 Flashcards
What must be considered when determining inventory quantities?
Include all inventory owned by the business and exclude inventory not owned.
How should goods in transit be handled in inventory?
Apply FOB shipping point and FOB destination rules to determine ownership.
Who owns consigned goods, and should they be included in inventory?
The consignor owns consigned goods, and they must be included in their inventory.
Are goods taken home ‘on approval’ by customers included in inventory?
Yes, they are still owned by the company until the customer confirms purchase.
Why is a physical inventory count necessary despite having accounting records?
To verify perpetual records and account for shrinkage or theft.
What are key internal controls for inventory counting?
Two people should count inventory, count everything twice, and reconcile counts with records.
What is the specific identification method in inventory valuation?
Tracks the cost of each specific unit sold and matches physical flow of goods.
When is the specific identification method most useful?
When goods are easily distinguishable, such as jewelry or cars.
What does the LCNRV rule state?
Inventory should be valued at the lower of its cost or net realizable value (NRV).
What is net realizable value (NRV)?
The expected selling price of inventory minus any costs to make it ready for sale.
What happens if NRV is lower than cost?
A write-down is required to reduce inventory value to NRV.
Can inventory be written back up if NRV increases?
Yes, but only up to the original cost, not higher.
Where is inventory reported on the financial statements?
On the statement of financial position at the lower of cost and NRV.
What inventory-related disclosures are required in financial statements?
Total inventory amount, cost formulas used, and write-downs or reversals.
What is the inventory turnover ratio formula?
Cost of Goods Sold ÷ Average Inventory.
What does a high inventory turnover ratio indicate?
Efficient inventory management and strong sales.
What is the formula for days in inventory?
365 ÷ Inventory Turnover Ratio.
Why is a low days in inventory ratio preferred?
It indicates faster inventory turnover and reduced storage costs.
