Chapter 6 Merchandise Inventory Flashcards
what are the accounting principles and controls that relate to merchandise inventory?
controls over merchandise inventory ensure that inventory purchases and sales are properly authorized and accounted for by the accounting system
what is the consistency principle?
businesses should use the same accounting methods and procedures from period to period
what is the disclosure principles?
a company’s financial statements should report enough information for outsiders to make knowledgeable decisions about the company
what is the materiality concept?
a company must perform strictly proper accounting only for significant terms
what is conservatism?
a company should exercise caution in reporting items in the financial statements
what are the four costing methods that can be used to determine merchandise inventory costs?
specific identification method - uses the specific cost of each unit of inventory to determine ending inventory and to determine cost of goods sold
first in, first out (FIFO) - first costs into inventory are the first costs out to cost of goods sold; ending inventory is based on the costs of the most recent purchases
Last in, first out (LIFO) - last costs into inventory are the first costs out to cost of goods sold; ending inventory is based on the costs of the oldest inventory
weighted-average method - method is based on the weighted average cost per unit of inventory after each purchase. weighted average cost per unit is determined by dividing the cost of goods available for sale by the number of units available for sale
how are merchandise inventory costs determined under a perpetual inventory system?
using the one of the four costing methods: specific ID method, FIFO, LIFO, and weighted average method
how are financial statements affected by using different inventory costing methods?
FIFO results in lowest cost of goods sold and the highest gross profit when costs are rising
LIFO results in highest cost of goods sold and the lowest gross profit when costs are rising
Weighted-average generates amounts for costs of goods sold and gross profit that fall between FIFO and LIFO if costs are consistently increasing or decreasing
how is merchandise inventory valued when using the lower-of-cost-or-market rule?
lower-of-cost-of-market requires that merchandise be reported in the financial statements at whichever is lower of the following:
the historical cost of the inventory and the market value of the inventory
An Adj entry must be recorded to write down inventory if the market value is lower than the historical cost
what are the effects of merchandise inventory errors on the financial statements?
an error in ending merchandise inventory creates a whole string of errors in other related accounts
one periods ending merchandise inventory becomes the next period’s beginning merchandise inventory
how do we use inventory turnover and days’ sales in inventory to evaluate business performance?
inventory turnover measures how rapidly merchandise inventory is sold and is calculated as: cost of goods sold / average merchandise inventory
what is day’s sales inventory?
measures the average number of days merchandise inventory is held by the company and is calculated as follows: 365 days / inventory turnover
how are merchandise inventory costs determined under a periodic inventory system?
Spec. Identification, FIFO, LIFO, and weighed-avg can be used in a periodic inventory system
Spec. ID, and FIFO will produce the same amounts for ending merchandise inventory and cost of goods sold under both the perpetual and periodic inventory systems
LIFO and weighed-avg result in different amounts for ending merchandise inventory and cost of goods sold under the perpetual and periodic inventory systems
how can the cost of ending merchandise inventory be estimated?
gross profit method- estimates the cost of ending merchandise inventory using the cost of goods sold formula and the gross profit percentage
retail method - estimates the cost of ending merchandise inventory based on the ratio of the goods available for sale at cost to the goods available for sale at retail
what is the specific identification method
an inventory costing method based on the specific cost of particular units of inventory
