PA Chapter 6

Question 1

Classifying Inventory in a merchandising company

Answer 1

Inventory

Question 2

Classifying inventory in a manufacturing company

Answer 2

RAW MATERIAL: basic goods that will be used in production but have not yet been placed into production
WORK IN PROCESS: has been placed into production process but is not yet complete
FINISHED GOODS: manufactured items that are completed and ready for sale

Question 3

Which account does inventory will be put in

Answer 3

current asset

Question 4

What does it mean when “enough inventory on hand and production will be slowing down”

Answer 4

Low level of raw materials and high level of finished goods

Question 5

What does it mean when “planning to step up production”

Answer 5

high level of raw material and low level of finished goods

Question 6

What is just-in-time inventory method

Answer 6

Companies manufacture or purchase goods only when needed =>depends on reliable suppliers

Question 7

what is physical inventory

Answer 7

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

Question 8

company often “take inventory” when

Answer 8

businesses are closed or are low
at the end of accounting period

Question 8

What are goods in transit

Answer 8

-purchased goods that are not yet received
-sold goods not yet delivered
-included in inventory of a company that has legal title to goods

Question 8

what is FOB Shipping point

Answer 8

ownership of the goods passes to the buyer

Question 8

What is FOB Destination

Answer 8

ownership of the goods remains with the seller until the goods reach the buyer.

Question 9

What are consigned goods

Answer 9

Holding goods of other parties and try to sell the goods for them for a fee but without taking ownership of the goods

Question 10

What is specific identification method

Answer 10

positively identify which particular units the company sold and which are still in ending inventory. => not practical

Question 11

what system to account for inventory when using the cost flow assumption

Answer 11

periodic inventory system

Question 11

What is the advantage of using the cost flow assumption

Answer 11

no accounting requirement that the cost flow assumption be consistent with the physical movement of the goods

Question 11

what is the cost of goods sold formula in a periodic system

Answer 11

beginning inventory + cost of goods purchased - Ending inventory = cost of goods sold

Question 12

What is the weighted average unit cost

Answer 12

the average cost that is weighted by the number of units purchased at each unit cost

Question 12

What is First-In, First-Out

Answer 12

assumes that the earliest goods purchased are the first to be sold
(the cost of the oldest units are recognized first)

Question 12

What is Last-In, First-Out

Answer 12

assumes that the latest goods purchased are the first to be sold
(the costs of the latest goods purchased are the first to be recognized in determining cost of goods sold)

Question 12

formula of the weighted average unit cost

Answer 12

cost of goods available for sale : total units available for sale = weighted average unit cost

Question 12

which cost flow method results in higher net income

Answer 12

FIFO

Question 12

What is average-cost

Answer 12

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

Question 13

which cost flow method results in lower net income

Answer 13

LIFO

Question 14

What happens to cost of goods sold and net income if the beginning inventory is understated

Answer 14

understated and overstated

Question 15

What happens to cost of goods sold and net income if the beginning inventory is overstated

Answer 15

overstated and understated

Question 16

What happens to cost of goods sold and net income if the ending inventory is understated

Answer 16

overstated and understated

Question 17

What happens to cost of goods sold and net income if the ending inventory is overstated

Answer 17

understated and overstated

Question 18

When the value of inventory is lower than its cost

Answer 18

-company must write down inventory to its net realizable value

Question 19

what is net realizable value

Answer 19

amount that company expects to realize (received from the sale of inventory)

Question 20

Why inventory management is a double edged sword

Answer 20

1. high inventory levels: may incur high carrying costs (investment, storage, insurance, obsolescence and damage)
2. Low inventory level: may lead to stock outs and lost sales

Question 21

What is inventory turnover

Answer 21

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

Question 22

What are days in inventory

Answer 22

measures the average number of days inventory is held
= days in year (365) : inventory turnover

Question 23

which cost flow method results in highest ending inventory

Answer 23

LIFO

Question 24

which cost flow method results in lowest income tax expense

Answer 24

LIFO

Question 25

which cost flow method results in the most stable earnings over a number of years

Answer 25

weighted average cost