module 6

Question 1

1. when inventory is purchased or produced it is…
2. when inventory is sold..

Answer 1

1. capitalized on the balance sheet
2. its cost is transferred from the balance sheet to the income statement as cost of goods
   sold

Question 2

capitalization

Answer 2

means that a cost is recorded on the
balance sheet and is not immediately expensed in the
income statement

Question 3

manufacturing costs consist of
three components:

Answer 3

1. Cost of direct (raw) materials used in the product,
2. Cost of direct labor to manufacture the product, and
3. Manufacturing overhead.

Question 4

The cost of inventory available at the beginning of a period is

Answer 4

a carryover from the
ending inventory balance of the prior period.

Question 5

Three choices for inventory costing:

Answer 5

FIFO, LIFO, and average cost

Question 6

FIFO

Answer 6

method transfers costs from inventory in the order that they were initially recorded.

Question 7

LIFO

Answer 7

method transfers the most recent inventory costs from the balance sheet to COGS.

Question 8

Average Cost

Answer 8

computes the cost of goods
sold as an average of the cost to purchase or
manufacture all of the inventories that were available
for sale during the period.

Question 9

Retail Inventory Costing

Answer 9

method allows retailers to readily
compute ending inventories at retail selling prices.
▪ Quantities available x Selling price
▪ The company’s inventory system tracks both the purchase cost
and the retail selling price of inventories.
▪ These are inputs in the cost-to-retail percentage calculation.

Question 10

Average days inventory outstanding (DIO),

Answer 10

tells us the number of days it took to sell the
inventory available for sale during the year
- the lower the better

Question 11

inventory turnover

Answer 11

approach tells us the number of days it would take
to sell the current ending inventories

Question 12

accounts payable turnover

Answer 12

measures the number of
payment cycles per period (year)

Question 13

Days payable outstanding

Answer 13

the average length of time that payables are deferred

Question 14

Each time a company completes one cash conversion cycle

Answer 14

, it
has purchased and sold inventory (realizing sales and gross
profit), and paid A/P and collected A/R

Question 15

depreciation

Answer 15

recognizes using up of the asset over its useful
life.

Question 16

To determine depreciation expense, a company
makes three estimates.

Answer 16

1. useful life
2. salvage value
3. depreciation method

Question 17

useful life

Answer 17

period of time over which the asset is
expected to generate measurable benefits.

Question 18

salvage value (residual)

Answer 18

amount expected for the asset
when disposed of at the end of its useful life.

Question 19

depreciation method

Answer 19

estimate of how the asset
is used up over its useful life.

Question 20

Straight Line Method

Answer 20

depreciation
expense is recognized evenly over the estimated useful
life of the asset as follows.

depreciation base= cost - salvage value
depreciation rate = 1/estimated useful life

Question 21

double declining balance method

Answer 21

For the double-declining-balance (DDB) method, the
depreciation base is net book value, which declines
over the life of the asset.
▪ The depreciation rate is twice the straight-line (SL) rate

Question 22

Companies typically use the SL method for
and an accelerated depreciation method for

Answer 22

financial reporting purposes
tax returns

Question 23

assets book value is

Answer 23

its acquisition cost less
accumulated depreciation.

Question 24

when an asset is sold…

Answer 24

its acquisition cost and related
accumulated depreciation are both removed from the
balance sheet and any gain or loss is reported in
income from continuing operations.

Question 25

restructuring

Answer 25

are designed to turn a company
around and are frequently initiated in response to:
▪ Poor performance
▪ Mounting debt
▪ Shareholder pressure
▪ A restructuring can involve
▪ Eliminating business segments
▪ Selling major assets
▪ Downsizing the workforce
▪ Reconfiguring debt
▪ Ultimately, the goal of a restructuring is to positively impact a
company’s long-term financial performance

Question 26

percent used up

Answer 26

the proportion
of a company’s depreciable assets that have already
been transferred to the income statement.