Chp 6

Question 1

The 2 steps in determining inventory quantities

Answer 1

1. Take physical inventory

2. Determine ownership of goods (who has legal title, such as for goods in transit)

Question 2

Generally what costs are included in costing inventory on hand?

Answer 2

All expenditures necessary to acquire the goods AND place them in a condition ready for sale.

Question 3

2 general ways to cost inventory

Answer 3

1. Specific identification

2. Use a cost flow assumption (FIFO, LIFO, average-cost)

Question 4

How to calculate average cost under periodic system

Answer 4

Cost of goods avail. for sale (carried + purchases) divided by total number of units.

This is a weighted average (cost weighted by the quantities)

Question 5

What is lower-of-cost-or-market (LCM)?

Answer 5

In costing inventory, co may use either. Can write down inventory to its market value (current replacement cost) in the period in which the price decline occurs.

Is example of conservatism: the best choice among accounting alternatives is the one least likely to overstate assets or net income.

Question 6

Full def of current market value of inventory

Answer 6

Cost of purchasing the same items at the present time from the usual suppliers in the usual quantities.

Question 7

Equation for determine COGS in periodic system

Answer 7

Beg Inventory (carried) + Purchases - Ending Inventory = COGS

-Use this to determine effect inventory error has on COGS

Question 8

Term for inventory costs such as investment in inventory, storage, insurance, obsolescence, and damage

Answer 8

carrying costs

Question 9

Names of the 2 ratios used to manage/evaluate inventory

Answer 9

1. inventory turnover (number of times inventory is sold during the period = inventory liquidity)
2. days in inventory (average number of days inventory is held = approximate time it takes inventory to sell)

Question 10

How to calculate inventory turnover

Answer 10

COGS/average inventory during the period

Average inventory during period = (usually) Beg Inv + Ending Inv divided by 2

Question 11

How to calculate days in inventory

Answer 11

365/inventory turnover

Question 12

Explain average cost under perpetual system

Answer 12

Uses moving average method = compute new average after each purchase. This new cost is then applies to BOTH units sold (COGS) and the remaining units on hand (to get ending inventory).

Question 13

Names for two methods of estimating inventory (primarily used with periodic inventory records b/c you don’t have perpetual inventory)

Answer 13

1. gross profit method

2. retail inventory method

Question 14

How to calculate estimated inventory using the gross profit method (to estimate cost of goods on hand at any given time)

Answer 14

Step 1. net sales - estimated gross profit - estimate COGS

Step 2. cost of goods available for sale - estimated COGS (from above) = estimated cost of inventory

Question 15

Explain the retail method of estimating inventory (cost of goods on hand at any given time) – 3 steps here

Answer 15

Uses both cost and retail price. 3 steps:

1. goods available sale (carried over plus purchases) at retail
   - net sales
   = ending inventory at retail
2. goods available for sale (carried over plus purchases) at cost/carried over goods available for sale at retail - cost-to-retail ratio
3. ending inventory at retail at retail x cost-to-retail ration = estimate cost of ending inventory