Chapter 6

Question 1

In the perpetual system, why is inventory taken?

Answer 1

1) Check accuracy of inventory records

2) Determine amount of inventory lost

Question 2

In the periodic system, why is inventory taken?

Answer 2

1) Determine the inventory on hand

2) Determine the cost of goods sold for the period

Question 3

What are the two steps to determining inventory quantities?

Answer 3

1) Take a physical inventory

2) Determine ownership of goods

Question 4

When is ownership of goods transferred?

Answer 4

It passes from the seller to buyer when the public carrier accepts the goods from the seller; therefore goods should be counted in inventory of the buyer

Question 5

When is ownership transferred in FOB shipping point?

Answer 5

When the product leaves the seller and is in the hands of a public carrier

Question 6

When is ownership transferred in FOB destination?

Answer 6

When the product is delivered to the buyer. When the buyer actually takes possession

Question 7

What does the specific identification method do?

Answer 7

This tracks the actual physical flow of the goods. Each item of inventory is coded with its specific cost.

Question 8

What are the assumed cost flow methods?

Answer 8

1) First-in, first-out (FIFO)
2) Last-in, first-out (LIFO)
3) Average Cost

Question 9

What does the FIFO method do?

Answer 9

Assumes that the earliest goods purchased are the first to be sold. The costs of the earliest goods purchased are the first to be recognized as cost of goods sold

Question 10

How can the accuracy of COGS be verified?

Answer 10

By recognizing that the first units acquired are the first units sold

Question 11

What does the LIFO method do?

Answer 11

Assumes that the latest goods purchased are the first sold. The costs of the latest goods purchased are the first to be cost of goods sold

Question 12

What does the average cost method do?

Answer 12

Assumes the goods available for sale are homogenous. The cost of goods available for sale is allocated on the basis of the weighted average unit cost incurred

Question 13

In periods of increasing prices, which method produces the most income?

Answer 13

FIFO, LIFO is lowest

Question 14

In periods of decreasing prices, which method produces the least income?

Answer 14

FIFO, LIFO is highest

Question 15

In periods of rising prices, which method is least taxable?

Answer 15

LIFO

Question 16

When is inventory written down to market value?

Answer 16

When the value of the inventory is less than its cost

Question 17

How do you compute inventory turnover ratio?

Answer 17

COGS/Avg inventory

Question 18

What does the inventory turnover ratio tell?

Answer 18

The ratio tells how many times the inventory turns over (is sold) during the year

Question 19

How do you calculate days in inventory?

Answer 19

365 days/inventory turnover ratio

Question 20

What is the LIFO reserve?

Answer 20

This is a requirement by GAAP for firms using LIFO to report the amount that inventory would increase if the FIFO method had been used instead.

Question 21

How do you calculate ending inventory under FIFO?

Answer 21

Ending inv under LIFO + LIFO reserve