Chapter 6

Question 1

Consigned goods

Answer 1

Goods shipped by a consignor, who retains ownership, to a party called the consignee, who holds the goods for sale.

Question 2

Consignee

Answer 2

The party that holds the consigned goods and is responsible for selling them, but does not own the goods (does not include the goods in their inventory count).

Question 3

Consignor

Answer 3

The party that owns the consigned goods, but has transferred them to a consignee who is responsible for selling them.

Question 4

Internal controls

Answer 4

Systems designed to help an organization achieve reliable financial reporting, effective and efficient operations, and compliances with relevant laws and regulations.

Question 5

Specific identification cost formula

Answer 5

An inventory cost formula used when goods are unique, identifiable items, and not ordinarily interchangeable. It follows the actual physical flow of goods, and individual items are specifically costed to arrive at the cost of goods sold and cost of ending inventory.

Question 6

First-in, first-out (FIFO) cost formula

Answer 6

An inventory cost formula that assumes that the costs of the earliest (oldest) goods acquired are the first to be recognized as the cost of goods sold.
The cost of the latest goods sold remain in ending inventory.

Question 7

Average cost formula

Answer 7

An inventory cost formula that assumes that the goods available for sale are homogeneous or non-distinguishable. The cost of goods sold and ending inventory are determined using a weighted average unit cost.

Weighted average unit cost = Cost of goods available for sale / Units available for sale.

Question 8

Lower of cost and net realizable value (LCNRV) rule

Answer 8

A basis for stating inventory at the lower of its original cost and its net realizable value at the end of the period.

Question 9

Net realizable value (NRV)

Answer 9

The selling price of an inventory item, less any costs required to make the item saleable.

Question 10

Inventory turnover ratio

Answer 10

A liquidity measure of the number of times, on average, that inventory is sold (“turned over”) during the period.

ITR = Cost of Goods Sold / Average Inventory.

Average Inventory = (Beginning inventory + Ending inventory) / 2.

Question 11

Days in inventory ratio

Answer 11

A liquidity measure of the average number of days that inventory is held.

DIIR = 365 / Inventory Turnover Ratio (ITR)