Chapter 8: Valuation Of Inventories

Question 1

Inventories are asset:

Answer 1

• Items held for sale in ordinary course of business
• goods to be used in production of goods sold

Question 2

Businesses with inventory consists of……

Answer 2

The merchandiser or manufacturer

Question 3

The merchandising company nas…..

Answer 3

• One inventory account, and purchase merchandise in a form ready for sale

Question 4

The manufacturing company consists of….

Answer 4

• Three accounts
  • raw materials
  • work in process
  • finished goods

Question 5

The perpetual system…..

Answer 5

• Purchases of merchandise are debited to inventory
• freight-in is debited to inventory. Purchase returns und allowances and purchase discounts are credited to inventory.
• cost of good sold is debited and inventory is credited for each sale.
• subsidiary records snow quantity and cost of each type of inventory on hand.

Question 6

The periodic system…..

Answer 6

• Purchases of merchandise are debited to purchases.
• ending inventory determined by physical count.
• calculation of cost of goods gold.

Question 7

Goods included in inventory

Answer 7

• Goods in transit
• consigned goods - goods out on consignment remain property of consignor, consignee makes no entry to inventory account for goods received.
• special sales agreements - sales with repurchase agreement and sales with high rates of return.

Question 8

Costs included in inventory:

Answer 8

• Product costs - bringing goods to buyers place of business and converting goods to salable condition.
• period costs - selling, general, and administrative expenses
• treatment of purchase discounts - gross vs net method

Question 9

Specific identification:

Answer 9

• Includes in cost of goods sold the costs of specific items sold.
• used for handling small number of costly distinguishable items
• actual cost vs actual revenue
• cost flow matches physical flow of goods
• may allow a company to manipulate net income

Question 10

What is average cost?

Answer 10

• Prices items in inventory on basis of average cost of similar goods during the period.
• not subject to income manipulation
• measuring specific physical flow of inventory is often impossible

Question 11

What are the cost flow assumptions?

Answer 11

FIFO, LIFO, and weighted average cost,

Question 12

LIFO reserve is:

Answer 12

Difference between the inventory method used for internal reporting purposes and LIFO

• LIFO is used for tax and external financial reporting purposes
• FIFO average last or standard cost system for internal reporting purposes

Reasons -
* pricing decisions
* record keeping is easier
* profit sharing or bonus arrangements
* LIFO troublesome for interim periods

Question 13

Note disclosure:

Answer 13

Companies should disclose either LIFO reserve or replacement cost of inventory

Question 14

LIFO liquidation:

Answer 14

Older, lower cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes.

Question 15

Specific goods approach tends to be unrealistic because:

Answer 15

• Cost of tracking inventory is expensive
• erosion of LIFO inventory which distorts net income and leads to substantial tax payments.