Chapter 8 Flashcards
What are inventories?
Inventories are goods and materials that a business holds for the purpose of resale.
True or False: Inventories are considered a current asset.
True
What is the primary purpose of inventory management?
The primary purpose is to ensure that a company has the right amount of inventory to meet customer demand while minimizing costs.
Fill in the blank: The _____ method assigns the most recent costs to the cost of goods sold.
LIFO
What does FIFO stand for?
First-In, First-Out
True or False: Under the FIFO method, the oldest inventory costs are used in calculating cost of goods sold.
True
Which inventory valuation method typically results in higher taxes during periods of rising prices?
LIFO
What is the weighted average cost method?
It calculates the cost of goods sold and ending inventory based on the average cost of all similar items available during the period.
How does the lower of cost or market rule apply to inventories?
It requires that inventories be valued at the lower of either their historical cost or their market value.
What is net realizable value?
Net realizable value is the estimated selling price of an inventory item minus any costs expected to be incurred to make the sale.
True or False: The LCM rule can lead to writing down inventory values.
True
What is a write-down in the context of inventory?
A write-down is a reduction in the book value of an inventory item when its market value falls below its cost.
What is the effect of inventory overstatement on financial statements?
It leads to overstated assets and net income.
Fill in the blank: The _____ method tracks the actual cost of each specific item of inventory.
specific identification
What is the purpose of inventory turnover ratio?
It measures how efficiently a company manages its inventory by indicating how many times inventory is sold and replaced over a period.
How is the inventory turnover ratio calculated?
It is calculated by dividing the cost of goods sold by the average inventory during a period.
True or False: A high inventory turnover ratio can indicate strong sales.
True
What is the impact of inventory shrinkage?
It reduces the amount of inventory available for sale and can result from theft, damage, or errors.
What is just-in-time (JIT) inventory management?
JIT is an inventory strategy that aligns raw-material orders from suppliers directly with production schedules.
Fill in the blank: The _____ inventory method can reduce holding costs.
just-in-time
What is the primary disadvantage of the LIFO method?
It can lead to outdated inventory costs on the balance sheet.
True or False: The weighted average method is best used when inventory items are indistinguishable.
True
What does the term ‘inventory write-off’ mean?
It refers to removing inventory from the books when it is no longer sellable or has no value.
What is the primary goal of inventory valuation?
To accurately reflect the value of inventory on financial statements.
