Chapter 6

Question 1

Why you take inventory for perpetual system

Answer 1

It is to check accuracy of inventory records

Question 2

Why do you take inventory for a periodic system?

Answer 2

determine inventory on hand

determine the cost of goods sold in a period of time

Question 3

Shipping term: FOB shipping point

Answer 3

From Seller to carrier is where the ownership passes on (united commerce)

Question 4

Shipping term: FOB Destination

Answer 4

When the product is received by the buyer then the owner ship is transferred from seller to buyer (fort knox ABF)

Question 5

Companies use different cash flow methods because…

Answer 5

income statement effects,
balance sheet effects,
tax effects.

Question 6

When looking at FIFO LIFO AND AVERAGE COSt methods…

Answer 6

they all have the same Cost of goods available for sale but ending inventory, cost of goods sold, gross profit and net income is different
why? because they have different flows of inventory of when and what was sold that could result in different results.

Question 7

Fifo vs Lifo vs average cost

Answer 7

In periods of increasing prices
FIFO the highest net income (think of a fife)
LIFO the lowest net income (L for lowest)
Average cost (stays in the middle because it is the average of the two…duh)
In periods of decreasing prices
(when things turn sour)
FiFO has the lowest net income
LIFO has the highest net income
Average cost (stays in the middle because it is the average of the two…duh)

Question 8

What happens to a balance sheet when prices rise? ( in regard to FIFO and LIFO)

Answer 8

during inflation, the costs in ending inventory using FIFO will be approximate current costs and provide highest net income

during increasing prices, the cost of the ending inventory using LIFO will be significantly understated and provide lowest inventory

LIFO will provide the lowest income taxes

Question 9

merchandising companies use only one inventory classification:

Answer 9

merchandise inventory to describe many different items that make up that inventory

Question 10

Determine inventory quantities (2 step)

Answer 10

1. take physical inventory of goods on hand. 2. Determine ownership of goods
   This also includes if goods have not been counted like if they are coming on freight (FOB is the buyer’s, FOB destination is the seller’s)

Question 11

Lower of Cost market value

Answer 11

(which ever number is lower is what you record because it is the lower cost of market value)

Under LCM, the market value is what it would cost to replace the inventory, not selling price.
Example of conservatism
When the value of inventory is less than its cost it is written down as market value.
So if the market value is higher than the cost value, then you’d record the cost value.
IF the cost value was higher than the market value, then you would record the market value (which ever number is lower is what you record because it is the lower cost of market value)

Question 12

LIFO reserve

Answer 12

check this one

Question 13

FIFO

Answer 13

first in first out. gives the best representaiton when prices have inflated because FIFO best represents inventory at its latest costs.
FIFO assumes first in first out and so what
that means is that the ending inventory would be comprised of our most recent purchases.

Question 14

LIFO

Answer 14

LIFO because ending inventory represents the earliest costs
LIFO assumes last in first
out so therefore ending inventory is comprised of our oldest units and so we begin with our
beginning inventory

Question 15

consignment

Answer 15

still owned by supplier

Question 16

determine whether to count inventory or not

Answer 16

if you shipped something FOB desitnation, you still own it until it arrives to buyer.