Chapter 6

Question 1

Prescribes that when choosing between two options, the one with the less favorable outcome is chosen

Answer 1

Conservatism Principle

Question 2

Principle that prescribes use of the same accounting method(s) over time so that financial statements are comparable across periods.

Answer 2

Consistency Principle

Question 3

Estimate of number of days needed to convert inventory into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by 365; also called days’ stock on hand.

Answer 3

Days’ sales in inventory

Question 4

Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.

Answer 4

First-in, first-out (FIFO)

Question 5

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Answer 5

Interim financial statements

Question 6

Number of times a company’s average inventory is sold during a period; computed by dividing cost of goods sold by average inventory; also called merchandise turnover.

Answer 6

Inventory turnover

Question 7

Method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.

Answer 7

Last-in, first-out (LIFO)

Question 8

Required method to report inventory at market replacement cost when that market cost is lower than recorded cost.

Answer 8

Lower of cost or market (LCM)

Question 9

Expected selling price (value) of an item minus the cost of making the sale.

Answer 9

Net realizable value

Question 10

Method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail.

Answer 10

Retail inventory method

Question 11

Method for assigning cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of goods sold and/or cost of inventory.

Answer 11

Specific identification (SI)

Question 12

Method for assigning inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale that is then multiplied by the units sold to yield the cost of that sale.

Answer 12

Weighted average (WA)