financial accounting chapter 5

19. What is the definition of 'market

' - Market in the term LCM is defined as the current replacement cost of purchasing the same inventory items in the usual manner.

23. How is "days' in inventory" calculated and what does it mean

- Estimate of number of days needed to convert inventory into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by 365. DSI= (ending I/ COGS ) x 365

13. Explain the Specific Identification method of inventory

- Method for assigning cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of goods sold and/or cost of inventory.

25. What is the retail inventory method

- Method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail.

9. Does the physical flow of inventory have to be the same as the cost flow

- No they do not.

22. How is the inventory turnover ratio calculated and what does it mean

- Number of times a company's average inventory is sold during a period; computed by dividing cost of goods sold by average inventory. IT= COGS/AV I

20. How does the conservatism constraint apply to inventory

- Principle that prescribes the less optimistic estimate when two estimates are about equally likely.

16. How does the consistency concept apply to inventory costing

- Principle that prescribes use of the same accounting method(s) over time so that financial statements are comparable across periods.

26. What is the gross profit method

- Procedure to estimate inventory by using the past gross profit rate to estimate cost of goods sold, which is then subtracted from the cost of goods available for sale.

18. What is the lower of cost or market concept (LCM)

- Required method to report inventory at market replacement cost when that market cost is lower than recorded cost.

15. What are the tax effects of costing methods

- Since inventory costs affect net income, they have potential tax effects

17. How does the full-disclosure principle apply to inventory costing

- The full-disclosure principle prescribes that the notes to the statements report this type of change, its justification, and its effect on income.

21. What are the financial statement (income statement and balance sheet) effects of inventory errors

- The income statement effects are the opposite of those for ending inventory. Errors in beginning inventory do not yield misstatements in the end-of-period balance sheet, but they do affect that current period's income statement.

1. What does merchandise inventory include

- all goods that a company owns and holds for sale.

12. Explain the Weighted Average method of inventory

- an average of the costs available. sent to cost of goods sold on the income statement.

4. Who is the consignor and who is the consignee

- consignor is an owner of goods held by another party who will sell them for the owner. Consignee is a receiver of goods owned by another who hold them for purposes of selling them for the owner.

3. What are goods on consignment

- goods shipped by the owner

2. When are goods in transit included in the purchaser's inventory

- if the ownership has passed to the purchaser.

10. Explain the FIFO method of inventory

- in the order incurred. it is sent to cost of goods sold on the income statement first.

11. Explain the LIFO method of inventory

- in the reverse order incurred. it is sent to cost of goods sold on the income statement.

14. What are the financial statement effects of costing methods

- inventory costing method assigns the same cost amounts to inventory and to cost of goods sold.

7. Why is a physical inventory taken

- it is used to adjust the inventory account balance to the actual inventory available.

6. How does the matching rule apply to inventory

- it states that inventory costs should be recorded against revenue in the period when the inventory is sold.

24. How does the perpetual and periodic methods of inventory differ

- periodic inventory system is when its Merchandise Inventory account is updated at the end of each period (monthly for Trekking) to reflect purchases and sales. Regardless of what inventory method or system is used, cost of goods available for sale must be allocated between cost of goods sold and ending inventory.

8. What are the four methods that are commonly used to assign costs to inventory and to cost of goods sold

- specific identification. First in first out (FIFO). Last in first out (LIFO). Weighted average.

5. How are damaged or obsolete goods handled

- they are not counted in the inventory and cannot be sold.