Periodic Inventory System and Cost-Flow Assumption

Question 1

What is the Cost Flow Assumption?

Answer 1

Assignment of the value to inventory from the balance sheet to the income statement

The physical flow of goods does not need to follow the cost flow

Question 2

Inventory Quantities can be tracked using which two methods?

Answer 2

Period system- Update periodically

Perpetual System- units are continuously updated

Question 3

What is a periodic accounting system?

Answer 3

Entity takes period accounts of ending inventory, once the ending quantity. Once that number of units is determined a value is assigned.

Question 4

What are components of purchases:

Answer 4

Gross Purchases 
\+ Transportation (freight-in) 
- Purchase returns and allowances 
- Purchase discounts 
= Net Purchases

Question 5

What are the four cost flow assumptions to assess the value of ending inventory?

Answer 5

1) Specific identification- Large products
2) Weighted average- Calculation of weighted average cost per unit
3) FIFO- Assuming the first items purchased are the first ones sold
4) LIFO- Last item purchased is the first to go over to cost of goods sold

Question 6

What is the calculation of weighted average cost per unit

Answer 6

Cost of goods available for sale/ number of units available for sale

Question 7

FIFO and perpetual inventory system yield the same results?

Answer 7

True

Question 8

What note disclosure is required for inventory?

Answer 8

What method the entity chose to use to value their inventory and cost of goods sold.

Question 9

T/F: Should inventory write-off’s be reduced from your cost of goods sold?

Answer 9

True– You need to reduce inventory write-offs from cost of goods sold in your calculation