Chapter 7

Question 1

Journal Entries in a Perpetual Inventory System

Answer 1

Acquisition and Returns
DR Inventory
Cr. Accounts payable

Sale
DR Accounts receivable
CR Sales

DR Cost of goods sold
DR Inventory

Question 2

Journal Entries in a Periodic Inventory System

Answer 2

Acquisition and Returns
DR Purchases
Cr Accounts payable

DR Accounts payable
CR Purchase returns

Sale
DR Accounts receivable
CR Sales

Closing
DR Inventory (physical count)
DR Cost of goods sold (difference)

CR Purchases (total amount for period)
CR Inventory (beginning balance)

Question 3

Define Specific Identification

Answer 3

requires determining which specific items are sold and therefore reflects the actual physical flow of goods. It can be used for special inventory items, such as automobiles or heavy equipment.

Question 4

moving-average method

Answer 4

is used only in a perpetual system

Question 5

The weighted-average method is used under

Answer 5

periodic inventory accounting system

Question 6

LIFO Conformity Rule

Answer 6

An IRS regulation requires LIFO to be used for financial reporting if it is used in the tax return.

Question 7

LIFO Valuation Allowance

Answer 7

a contra account used to true up the LIFO inventory account at year end.

Question 8

Is LIFO allowed in iFRS?

Answer 8

no.

Question 9

An advantage of FIFO

Answer 9

is that ending inventory approximates the market value

Question 10

A disadvantage of FIFO

Answer 10

is that current revenues are matched with older costs

Question 11

In a time of rising prices (inflation), use of the LIFO method results

Answer 11

the lowest year-end inventory, the highest cost of goods sold, and the lowest gross profit.

Question 12

Calculate dollar value life price index

Answer 12

current inventory costs/base year inventory costs

Question 13

Inventory accounted for using LIFO or the retail inventory method is measured at

Answer 13

the lower of cost or market (LCM)

Question 14

Inventory accounted for using any other cost method (e.g., FIFO or average cost) is measured at

Answer 14

the lower of cost or net realizable value.

Question 15

he loss on write-down of inventory to market or net realizable value (NRV) generally is presented as

Answer 15

component of cost of goods sold. However, if the amount of loss is material, it should be presented as a separate line item in the current-period income statement.

Question 16

Can you reverse a write down in inventory in an annual financial statement

Answer 16

No, once inventory is written down below cost, the reduced amount is the new cost basis.

Question 17

how do you measure inventory in IFRS

Answer 17

lower of cost or net realizable value

Question 18

When ending inventory is overstated, cost of goods sold

Answer 18

will be understated

Question 19

When beginning inventory is understated, cost of goods sold

Answer 19

will be understated

Question 20

Is estimated gross profit method used for intern reporting or year end reporting?

Answer 20

interm

Question 21

During periods of rising prices, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which inventory cost flow methods

Answer 21

FIFO