Simple Study - Module 10

Question 1

Primary basis of accounting for inventories:

Answer 1

cost (includes cash or other fair value of consideration given in exchange for it)

Question 2

Inventory cost is a function of two variables:

Answer 2

1. The number of units included in inventory

2. The costs attached to those units

Question 3

What is NOT included in the cost of inventory?

Answer 3

Interest paid to vendors

Question 4

Periodic Inventory System

Answer 4

Inventory is counted periodically and then priced. The ending inventory is usually recorded in the cost of goods sold entry.

Question 5

Perpetual Inventory System

Answer 5

A running total is kept of the units on hand by recording all increases and decreases as then occur. When inventory is purchased, the inventory account, rather than purchases, is debited.

Question 6

Ending Inventory xx
COGS (plug)
Beginning Inventory xx
Purchases xx

Answer 6

Periodic Inventory System

Question 7

COGS (cost)

Inventory (cost)

Answer 7

Perpetual Inventory System

Question 8

Specific Identification

Answer 8

The seller determines which item is sold. (Seller has 4 identical machines that cost him $200, $265, $186, and $235. Since all the machines are the same, the purchases does not care which machine he gets.)

Question 9

Weighted-Average

Answer 9

The seller averages the cost of all the items on hand and purchased during the period.
Cost Units
Beginning Inventory $200 100 ($2/unit)
Purchase 1 315 150 ($2.10/unit)
Purchase 2 85 50 ($1.70/unit)
Total 600 300
Weighted Average cost = $600/300 = $2/unit

Question 10

Simple Average

Answer 10

Seller does not weigh the average for units purchased. Above example would be 2 + 2.10 + 1.70 = $1.93

Question 11

Moving Average

Answer 11

The average cost of goods on hand must be recalculated any time additional inventory is purchased at a unit cost different from the previously calculated average cost of goods on hand. (sales do not change the unit price because they are taken out of inventory at the average price)

Question 12

Lower of cost or market

Answer 12

A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as its cost.

Question 13

Losses on purchase commitments

Answer 13

PC (purchase commitments) result from legally enforceable contract to purchase specific quantities of goods at fixed prices in the future.

Question 14

FIFO

Answer 14

First In - First Out | The goods from beginning inventory and the earliest purchases are assumed to be the goods sold first. Thus, inventory is composed of the newest goods.

Question 15

LIFO

Answer 15

Last In - First Out | The most recent purchases are assumed to be the first goods sold, thus inventory is composed of the oldest goods.

Question 16

LIFO conformity rule

Answer 16

If LIFO is used for tax purposes, it must be used for financial reporting purposes.

Question 17

LIFO reserve account

Answer 17

When a company uses LIFO for external reporting purposes and another inventory method for internal purposes, a LIFO Reserve account is used to reduce inventory from the internal valuation to the LIFO valuation. LIFO Reserve is a contra account to inventory, and is adjusted up or down at year-end with a corresponding increase or decrease to COGS.

Question 18

Dollar-Value LIFO

Answer 18

Applied to pools of inventory rather than to individual items. Thus, the cost of keeping inventory records is less under dollar-value LIFO than under LIFO.

Question 19

Individual Layers in a dollar-value LIFO inventory are valued as follows:

Answer 19

$ Value LIFO = Inventory at base-year prices * Conversion price index

Question 20

Double-Extension Technique

Answer 20

EI at end of year prices / EI at base-year prices =

Conversion Price Index