Inventories

Question 1

perpetual inventory system

Answer 1

maintain detailed records of the cost of each inventory purchase and sale und records continuously

Question 2

periodic inventory system

Answer 2

do not keep detailed records of the goods on hand. The cost of goods sold determined by count at the end of the accounting period

Question 3

FOB shipping point

Answer 3

ownership passes to buyer when the carrier accepts the goods form the seller, the purchaser pays freight costs

Question 4

FOB destination

Answer 4

ownership passes to purchaser at the delivery, seller pays freight costs

Question 5

purchase return

Answer 5

return goods for credit or cash refund, if the purchaser is dissatisfied with goods because there are damaged, defective, of inferior quality or do not meet specifications

Question 6

purchase allowance

Answer 6

purchaser choose to keep the merchandise if the seller grant an deduction from the price

Question 7

purchase discount

Answer 7

credit terms may permit buyer to claim a cash discount for prompt payment

Question 8

physical inventory

Answer 8

involves counting, weighing or measuring each kind of inventory on hand

Question 9

goods in transit

Answer 9

should be included in the inventory of the company that has the legal title to the goods

Question 10

consigend goods

Answer 10

goods held for sale by one party, ownership of the goods is retained by another party

Question 11

acutal physical flow costing method

Answer 11

items still in inventory are specifically costed to arrive at the total cost of the ending inventory, practice is relatively rare

Question 12

FIFO

Answer 12

first in first out, earliest goods purchased are first to be sold

Question 13

average cost

Answer 13

allocates cost of goods available for sale on the basis of weighted-average unit cost incurred

Question 14

Cost flow methods

Answer 14

should be used consistently, enhances comparability

Question 15

lower-of-cost-or-net reliazable value

Answer 15

companies must write down the inventory to its net realizable value in the period in which the price decline occurs

Question 16

et realizable value

Answer 16

net amount that a company expects to receive form sale of inventory

Question 17

Causes for inventory errors

Answer 17

• failure to count or price inventory correctly

- not properly recognizing the transfer of legal title to goods in transit

Question 18

consequenses of inventory Errors

Answer 18

Errors affect both income statement and statement of financial position, because they affect the computation of cost of goods sold and net income in two periods. An error in ending inventory will have reverse effect on net income of the next accounting period. Over two years the total net income is correct because the errors offset each other.

Question 19

cost of goods sold

Answer 19

= beginning inventory + cost of goods purchased – ending inventory

Question 20

Inventory turnover

Answer 20

= cost of goods sold / average inventory, measures the number of times on average the inventory is sold during the period

Question 21

days in inventory

Answer 21

365 / inventory turnover, measures the average number of days inventory is held

Question 22

Gross profit method

Answer 22

estimates the cost of ending inventory by applying a gross profit rate to net sales:
net sales – estimated gross profit = estimated cost of goods sold
cost of goods available – estimated cost of goods sold = estimated cost of ending inventory

Question 23

retail inventory method

Answer 23

company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost:
goods available for sale at retail – net sales = ending inventory at retail
goods available for sale at cost / goods available for sale at retail = cost-to-retail ratio
ending inventory at retail * cost-to-retail ratio = estimated cost of ending inventory