Chapter 7

Question 1

Items Included in Inventory

Answer 1

• Merchandisers: Merchandise, Inventroy
• Manufacturers: raw materials inv, work in progress inv, finished goods inv

Question 2

When is inventory initially recorded

Answer 2

at cost

Question 3

What does inventory cost include

Answer 3

costs to bring an article to usuable condition and location

Question 4

When should company cease accumulating purchase costs

Answer 4

when the raw materials are ready for use or when merch. inventory is ready for shipment

Question 5

Where should costs related to selling be

Answer 5

in selling, general, and admin expenses

Question 6

Perpetual Inventory System

Answer 6

Purchase transactions recorded directly in an inventory account

Sales require 2 entires to record
1) Sale (A/R sales)
2) COGS (cogs, inv journal entry)

Question 7

Periodic Inventory System

Answer 7

No up-to-date record of inventory is maintained during the year

• sales require one entry to record sale
• COGS is calculated at end of period

Question 8

Cost Flow Assumption

Answer 8

Choice of an inventory costing method is NOT based on physical flow of goods (FIFO, LIFO, Avg cost)

Question 9

Which produces the highest COGS in time of inflation

Answer 9

LIFO —> NI is the lowest, produces lowest income tax

Question 10

Valuation at Lower Cost or Net Realizable Value

Answer 10

• inventories should be measured initially at their purchase cost

Question 11

Net Realizable Value

Answer 11

What you can still sell it for

Question 12

Measuring Inventories at Lower Cost

Answer 12

When the NRV of goods in ending inventory falls below the cost, these goods must be assigned a unit cost equal to the NRV

Question 13

Conservatism Constraint

Answer 13

requires companies to avoid overstating assets and income
- NRV based on

Question 14

NRV is important for 2 company types

Answer 14

1) High Tech companies
2) Companies that sell seasonal goods

Question 15

NRV < original cost

Answer 15

Company must write down entry to reduce inventory balance to NRV (Dr COGS, Cr Inventory)

Question 16

Recognize “holding” loss

Answer 16

period in which the NRV of an item drops below original cost

Question 17

How does a write-down of NRV affect pretax income

Answer 17

• decreases in current period
• increases in period of sale by same amount

Question 18

If NRV > original cost

Answer 18

No write down necessary
- Recognition of holding gains is not recognized by GAAP

Question 19

What does inventory turnover measure

Answer 19

Measures efficiency of inventory management activities
- primary goal of inventory management is to have enough inventory available to serve customers while minimizing cost of carrying inventory

Question 20

What does the inventory turnover ratio reflect

Answer 20

• how many times avg inventory was produced and sold during period
• increase indicates that inventory moves more quickly through the production process to customer, thus decreasing storage costs

Question 21

What does average days to sell inventory reflect

Answer 21

average time in days it takes a company to produce and deliver inventory to customer

Question 22

Stages

Answer 22

1) Purchasing production activities
2) Add to inventory on Balance Sheet
3) Sale – COGS on income statement