Chapter 7

Question 1

Used the least, small businesses with few items

Answer 1

Specific identification

Question 2

What is FIFO?

Answer 2

First in first out; oldest ones out

Question 3

What is LIFO?

Answer 3

Last in first out; newest ones out

Question 4

Cost of goods available/total # of units available = ???

Answer 4

Weighted average

Question 5

Why do firms like to use LIFO for taxes?

Answer 5

LIFO results in lower net income which means lower taxes

Question 6

What is the LIFO conformity rule (law)?

Answer 6

If you use LIFO for taxes you must use LIFO for GAAP

Question 7

What produces lower COGS?

Answer 7

FIFO

Question 8

T/F: LIFO produces lower COGS?

Answer 8

FALSE

Question 9

What cost flow assumption results in higher net income, ending inventory, and taxes?

Answer 9

FIFO

Question 10

What cost flow assumption results with low net income, low ending inventory, and low taxes?

Answer 10

LIFO

Question 11

Can companies file their taxes with LIFO and their financial statements (GAAP) with FIFO?

Answer 11

NO!

Question 12

Who is “in charge” or ministers laws in tax land?

Answer 12

IRS

Question 13

Who is in charge in IASB land?

Answer 13

IFRS

Question 14

T/F: LIFO is banned under the IFRS

Answer 14

TRUE

Question 15

Why is LIFO banned under IFRS?

Answer 15

rarely represents the actual physical flow of the goods

Question 16

Why is LIFO not banned under GAAP?

Answer 16

The business community wants lower taxes

Question 17

If something has a lower market value than originally stated, what is that called/what needs to happen?

Answer 17

This is called an inventory write-down. A journal entry must be made about the difference between the original ending balance and the final ending balance.

Question 18

What is the LCM rule?

Answer 18

inventory is reported at its market value (the amount paid to acquire it)

Question 19

Why do firms do a physical count of inventory at least annually?

Answer 19

To count what was actually sold, and compare it to what was bought (can see if anything has been stolen).

Question 20

What is inventory shrinkage?

Answer 20

When inventory disappears, and shrunk from something other than people actually buying the product (stealing or workers using the inventory and not paying).

Question 21

What would be included in a shrinkage journal entry?

Answer 21

Debit: Shrinkage loss (+E)
Credit: Inventory (-A)

Question 22

Equation for Inventory Turnover Ratio:

Answer 22

COGS/Average inv. (beg. inv. + end inv./2)

Question 23

Equation for Accounts Receivable Turnover Ratio:

Answer 23

Sales/Avg. accounts receivable (beg. A/R + end. A/R / 2)

Question 24

Equation for the days to sell inventory:

Answer 24

365/inventory turnover ratio (lower is better)

Question 25

What does the inventory turnover ratio and days to sell inventory tell investors?

Answer 25

The higher the ITR means the company is selling quickly (good, effective management)

The lower the number of days indicated that the company can quickly convert inventory into cash

Question 26

How could a firm increase its inventory turnover ratio?

Answer 26

Reduce your inventory or increase how much you are selling