Chapter 6 Inventory Costing

Question 0

3 inventory cost determination methods

Answer 0

Specific Identification
FIFO
Weighted Average

Question 1

Differences between perpetual and periodic when taking inventory

Answer 1

Perpetual - inventory is updated continuously (but inventory is still counted at least once/year), and an adjusting entry is made if it doesn’t match
Periodic - a physical count of inventory is taken at the end of each year

Question 2

What is specific identification and when is it used?

Answer 2

It tracks the actual physical flow of goods, with each item marked with its cost; used where goods are unique and not interchangable

Question 3

What is FIFO?

Answer 3

First-in, first-out; earliest goods are sold first; often reflects the actual flow of merchandise

Question 4

What is weighted average and when is it used?

Answer 4

)COGAS / Units Available for Sale); not practical to measure specific flow (e.g. too many of very similar products); for perpetual a new average is calculated after each purchase

Question 5

When prices (goods) rising, \_\_\_ produces higher profit.
When prices falling, \_\_\_ produces higher profit.

Answer 5

$ rising = higher profit with FIFO (lower COGS)

$ falling = higher profit with Weighted Average (FIFO would have higher COGS)

Question 6

What are consigned goods?

Answer 6

When a consignee holds goods belonging to other parties and sells them for a fee, WITHOUT ever taking ownership of the goods.

Question 7

Consignee vs. consignor

Answer 7

Consignee - the one holding and selling the goods

Consignor - the one who actually has ownership of the goods (until sold)

Question 8

T/F: Consigned goods are included in the Merchandise Inventory account of the consignee.

Answer 8

False, they do not own the goods.

Question 9

T/F: Goods on approval are not added to inventory count.

Answer 9

False, goods on approval should be added to physical inventory count as they still belong to the seller. The buyer will either return the goods or buy them.

Question 10

Entry to record damaged or unsellable goods

Answer 10

Dr. COGS

Cr. Merchandise Inventory

Question 11

Internal control for counting inventory

Answer 11

1. Counting done by employees not responsible for inventory and inventory records.
2. Authenticity of each item confirmed by each counter.
3. Counting should be done by at least 2 people, and verified by supervisor.
4. Pre-numbered inventory tags should be used to ensure each item has only been counted once.

Question 12

LCNRV is an example of the accounting concept of…

Answer 12

Conservatism - choosing the best method that is least likely to overstate assets and net income

Question 13

Lower of cost and net realizable value (LCNRV)

Answer 13

Lower of cost: If you purchase merchandise for a price higher than replacement cost, you recorded at the lower price.
Net realizable value: The estimated selling price minus any costs to make the product ready to sell.

Question 14

Inventory turnover ratio

Answer 14

The number of times inventory is “turned over” during a period;
COGS / Average inventory [(Beg + End)/2]

Question 15

Day sales in inventory ratio

Answer 15

The # of days on average that inventory is held before it is sold;
365 (days in year) / inventory turnover ratio