Chapter 6: Inventory Costing

Question 1

Explain the two methods of Inventory Cost Determination

Answer 1

First-In, First-Out: Costs are tracked at every purchase. The first-in, first-out (FIFO) cost formula assumes that the earliest (oldest) goods purchased are the first ones to be sold.

Weighted Average: Costs are calculated with every purchase. The allocation of the cost of goods available for sale is based on the weighted average unit cost. Cost of Goods available for sale / Total Units available for sale = Weighted Average Unit Cost.

Question 2

What is LCNRV and How do you calculate it.

Answer 2

Inventory is valued at the lower of cost and net realizable value. Whenever NRV is lower than cost, the inventory value shown on the balance sheet must be written down to the lower value. If the value increases before it’s sold, the write down is reversed.

Question 3

How do you calculate the Inventory Turnover Ratio and what information does it provide?

Answer 3

Cost of Goods Sold / Average Inventory (Beginning Inventory + Ending Inventory /2) = Inventory Turnover Ratio. This tells you the number of times the inventory turns over during a given period.

Question 4

How do you calculate the Days Sales in Inventory Ratio and what information does it provide?

Answer 4

Days in the Year (365) / Inventory Turnover = Days Sales in Inventory. This ratio tells you the approx number of days that the inventory is on hand before being sold.