Chapter 7

Question 1

3 inventory classifications of a manufacturing company

Answer 1

Raw materials, work in process, and finished goods

Question 2

FOB shipping point: ownership

Answer 2

Buyer

Question 3

FOB destination: ownership

Answer 3

Seller

Question 4

Cost of inventory includes…

Answer 4

All expenditures necessary to acquire goods and place them in a condition ready for sale

Question 5

What do cost flow assumptions assume

Answer 5

Assume flow of costs that may be unrelated to the physical flow of goods

Question 6

3 assumed cost flow methods

Answer 6

FIFO, LIFO, average cost

Question 7

Cost of goods sold =

Answer 7

(beginning inventory + purchases) - ending inventory

Question 8

FIFO

Answer 8

Costs of earliest goods purchased are the first to be recognized in determining COGS

Question 9

LIFO

Answer 9

Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold

Question 10

Why would a company adopt different inventory cost flow methods

Answer 10

1. Income statement effects
2. Balance sheet effects
3. Tax effects

Question 11

FIFO and LIFO: the balance sheet

Answer 11

During inflation…
FIFO = costs allocated to ending inventory will approximate the inventory’s current cost
LIFO = costs allocated to ending inventory will be understated in terms of cost

Question 12

Direct write-off method for uncollectible accounts

Answer 12

When a company determined receivables to be uncollectible it charges the loss to bad debt expense

Question 13

Allowance method for uncollectible accounts

Answer 13

Record estimated uncollectible as an increase to bad debt expense and an increase to allowance for doubtful accounts

Question 14

A write off of an uncollectible account on affects…

Answer 14

Balance sheet accounts

Question 15

2 methods for estimating uncollectible allowance

Answer 15

Percentage of receivables

Aging the accounts