Lecture 8 - Inventory

Question 1

2 methods of recognizing purchase discounts

Answer 1

Gross method

Net method

Question 2

Gross method

Answer 2

If purchase discount is lost, goes into COGS

Question 3

Net method

Answer 3

If purchase discount is lost it is expensed

Question 4

Recording LC or NRV direct method

Answer 4

Inventory is recorded at end of year at lower

Loss becomes part of COGS

Question 5

Recording LC or NRV indirect (allowance) method

Answer 5

Inventory is recorded at cost with declines/recoveries recorded through an allowance account on the balance sheet and a loss account on the income statement

Recovery of market value decline is recorded up to but not exceeding original cost

Question 6

Gross profit method of estimating inventory: 3 assumptions

Answer 6

1. BI + purchases = COGAS
2. Goods not sold are in EI
3. COGAS - COGS = EI

Question 7

Markup % formula

Answer 7

Gross profit % = markup % / (1 + markup %)

Question 8

Gross margin equation

Answer 8

Gross margin = (sales - COGS)/sales

Question 9

Markup formula

Answer 9

Markup = (sales - COGS) / COGS