Fundamental Accounting Principles CH6

Question 1

Goods on Consignment

Answer 1

Goods on consignment are goods shipped by the owner, called the consignor, to another party, the consignee.

Question 2

Net Realizable Value

Answer 2

Value is sales price - the cost of making the sale. A loss is recorded when the damage or obsolesce occurs.

Question 3

Inventory Costs

Answer 3

Inventory costs include invoice cost minus any discount, plus any other costs. Other costs include shipping, storage, import duties, and insurance.

Question 4

Expenses Recognition Principle

Answer 4

states that inventory costs are expensed as cost of goods sold when inventory is sold.

Question 5

Internal Controls and Taking a Physical Count

Answer 5

Events can cause the Inventory account balance to be different than the actual Inventory available. Such events include theft, loss, damage, and errors.

Question 6

Internal controls for Inventory

Answer 6

• Prenumbered inventory tickets are distributed to counters - each ticket must be accounted for.
• Counters of inventory are assigned and do not include those responsible for inventory.
• Counters confirm the existence, amount and condition of inventory.
• a second count is taken by a different counter.
• a manager confirms all inventories are ticketed once, and only once.

Question 7

Four methods to assign inventory and to cost of goods sold

Answer 7

1. Specific identification
2. first-in, first-out (FIFO)
3. Last-in, First-out (LIFO)
4. Weighted average
   * Goods purchased column is identical for all methods.

Question 8

FIFO (First in, First out)

Answer 8

assumes cost flow in the order incurred.
assumes inventory items are sold in the order acquired. Leaves the cost from the most recent purchases in ending inventory.
*Yields the highest gross profit and net income

Question 9

LIFO (last in, First out)

Answer 9

assumes cost flow in the reverse order incurred.
Assumes that the most recent purchases are sold first. By assigning costs from the most recent purchases to cost of goods sold, LIFO comes closest to matching current costs of goods sold with revenue.
*yields the lowest gross profit and net income

Question 10

Weighted average

Answer 10

assumes cost flow at an average of the costs available.

*yields results between FIFO and LIFO

Question 11

Specific Identification

Answer 11

common for custom made inventory

Jewelers, fashion designers.

Question 12

Weighted Average

Answer 12

requires that we use the weighted average cost per unit of inventory at the time of each sale.
= COGS at each sales/# of units available at each sale

Question 13

Kickbacks and Invoice Fraud

Answer 13

Inventory safeguards include restricted access, use of authorized requisitions, and security measures. Proper accounting includes matching inventory received with purchase order terms and quality requirements, preventing misstatements, and controlling access records.

Question 14

Rising Costs

Answer 14

When purchase costs regularly rise, the following occurs,
FIFO reports are the lowest cost of goods sold
LIFO reports the highest COGS
Weighted average yields results between FIFO and LIFO

Question 15

Falling Costs

Answer 15

When costs regularly decline, the revers occurs for FIFO and LIFO
FIFO gives the highest COGS
LIFO gives the lowest COGS

Question 16

Method Advantages

Answer 16

Each method offers advantages.
FIFO - inventory on the balances sheet approximates its current cost; it also follows the actual flow of goods for most businesses.
LIFO - COGS on the income statement approximates its current cost; it also better matches current costs with revenue.
Weighted Average - smooths out erratic changes in costs.
Specific Identification - matches the costs of items with the revenues they generate.

Question 17

LCM - Lower of cost or market

Answer 17

applied to each individual item always yields the lowest inventory.
Applied 3 ways
1. each individual item separately
2. major categories or items
3. the whole of inventory

Question 18

Inventory Relation

Answer 18

Beginning inventory + net purchases - ending inventory = COGS

Question 19

Inventory Turnover

Answer 19

called merchandise inventory turnover
= COGS/Average Inventory
*Lower inventory turnover can reveal obsolescence.

Question 20

Gross Profit Method

Answer 20

estimates the cost of ending inventory by applying the gross profit ratio to net sales.

Question 21

FOB Shiping point

Answer 21

goods are included in buyer’s inventory once they are shipped.

Question 22

FOB destination

Answer 22

goods are included in buyer’s inventory after arrival at their destination

Question 23

Consignee

Answer 23

Never reports consigned goods in inventory; stays in consignor’s inventory until sold

Question 24

Merchandise inventory

Answer 24

Includes any necessary costs to make an item ready for sale. Examples- shipping, storage, import fees, and insurance.