Accounting Ch 6: Inventories

consignor

manufacturer

inventory turnover

measures the relationship between cost of merchandise sold and the amount of inventory carried during the period

consignee

retailer

physical inventory

should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate

weighted average inventory cost flow method

the cost of the units sold and in ending inventory is a weighted average of the purchase costs

market

the cost to replace the merchandise on the inventory date

net realizable value

the estimated selling price less any direct costs of disposal, such as sales commissions or special advertising

first-in, first out (FIFO) inventory cost flow method

the first units purchased are assumed to be sold first and the ending inventory is made up of the most recent purchases

cost

the primary basis for valuing and reporting inventories in the financial statements

specific identification inventory cost flow method

the unit sold is identified with a specific purchase

gross profit method

uses the estimated gross profit for the period to estimate the inventory at the end of the period

weighted average cost method

uses the weighted average unit cost for determining cost of merchandise sold and the ending merchandise inventory

"eat into the LIFO layers"

Companies with losses may choose to lower inventory levels at year end to _________________________ and raise net income for the year

security measures

Controls for safeguarding inventory should include ____________ to prevent damage and customer or employee theft

Each item in the inventory. Each major class or category of inventory. Total inventory as a whole.

Cost and replacement cost can be determined for the following:

purchase order

authorizes the purchase of the inventory from an approved vendor

ending inventory cost

A ratio of cost to retail price is then used to convert ending inventory at retail to estimate the ____________________

footnotes

Detail about method usually shown in the ______________ to the financial statements

income tax savings

During a period of rising prices, using LIFO offers an ___________________________ compared to the other two inventory costing methods

"LIFO layers"

IRS puts more audit focus on LIFO accounting since ______________________ must be maintained.

consigned inventory

Inventory errors often arise from __________________. Manufacturers sometimes ship merchandise to retailers who act as the manufacturer's agent

current assets

Merchandise inventory is usually presented in the ______________ section of the balance sheet, following receivables

net realizable value

Merchandise that is out of date, spoiled, or damaged should be written down to its ___________________

LIFO and FIFO

Net income for the weighted average cost method is somewhere between the net incomes of _______________

subsidiary inventory ledger

Recording inventory using a perpetual inventory system is also an effective means of control. The amount of inventory is always available in the ____________________

Physical inventory on hand was miscounted. Costs were incorrectly assigned to inventory. Inventory in transit was incorrectly included or excluded from inventory. Consigned inventory was incorrectly included or excluded from inventory.

Some reasons that inventory errors may occur include the following:

FIFO and LIFO

The weighted average cost method of inventory costing is a compromise between ______________

moving average

This unit cost is then used to determine the cost of each sale until another purchase is made and a new average is computed. This averaging technique is called a ____________

Safeguarding the inventory from damage or theft. Reporting inventory in the financial statements.

Two primary objectives of control over inventory are:

periodic inventory system

Using FIFO, the earliest batch purchased is considered the first batch of merchandise sold. The physical flow does not have to match the accounting method chosen. This time we will be examining the ________________________

larger

When the FIFO method is used during a period of inflation or rising prices, FIFO will show a ____________ profit than the other two inventory costing methods

lower

When the LIFO method is used during a period of inflation or rising prices, LIFO will show a ________________ profit than the other two inventory costing methods

perpetual system

When the weighted average cost method is used in a __________________________, an average unit cost for each item is computed each time a purchase is made

receiving report

establishes an initial record of the receipt of the inventory

retail inventory method

estimating inventory cost requires costs and retail prices to be maintained for the merchandise available for sale

The cost of replacing items in inventory is below the recorded cost. The inventory cannot be sold at normal prices due to imperfections, style changes, or other causes.

inventory may be valued at other than cost in the following cases: