Chapter 6 ACC201

Lower of Cost or Market (LCM)

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.

When is a physical inventory usually taken?

At the end of the company's fiscal year.

Day's in Inventory

Average days' inventory on hand indicates the average number of days required to sell the inventory on hand. DI = # of Days in a Year / Inventory Turnover

In periods of rising prices, which is an advantage of using the LIFO inventory costing method?

Cost of goods sold will include latest (most recent) costs and thus will be more realistic.

Cost of Ending Inventory

Ending Inventory x Average Cost Per Unit = Cost of Ending Inventory

Which of the following is not an inventory account? - Equipment - Raw Materials - Work In Process - Finished Goods

Equipment

In periods of inflation, phantom or paper profits may be reported as a result of using the

FIFO costing assumption.

Ownership passes to the buyer when purchased goods are received from a public carrier if the goods are shipped.

FOB destination.

In a period of inflation, LIFO produces a higher net income than FIFO.

False

Consigned Goods

Goods held for sale by one party although ownership of the goods is retained by another party.

Inventory Turnover

Inventory Turnover indicates the number of times a company's average inventory is sold during an accounting period. IT = Cost of Goods Sold (COGS) / Average Inventory

FIFO Inventory Method

It assumes that the cost of the earliest units purchased are the first to be allocated to cost of goods sold.

In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?

LIFO

With the assumption of costs and prices generally rising, which of the following is correct?

LIFO provides the closest valuation of cost of goods sold to replacement cost of inventory sold.

Which of the following is not an acceptable inventory costing method?

Last-in, last-out

In periods of rising prices, what will LIFO produce?

Lower net income than FIFO

First In First Out (FIFO)

Method assumes that the earliest goods purchased are the first to be sold. Under FIFO, the cost of the ending inventory is obtained by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed.

Last-in, First-out (LIFO)

Method assumes that the last goods purchased are the first to be sold. LIFO seldom coincides with the actual physical flow of inventory.

When a perpetual inventory system is used, which of the following is a purpose of taking a physical inventory?

To check the accuracy of the perpetual inventory records.

Cost of Goods Sold

Total Amount - Cost of Ending Inventory = Cost of Goods Sold

Average Cost Per Unit

Total Amount / Total Units = Average Cost Per Unit

Under FIFO, cost of goods sold consists of the units with the oldest costs.

True

When the terms of a sale are FOB destination, legal title to the goods passes to the buyer when the goods reach the buyer's place of business.

True

Which of the following statements is correct with respect to inventories?

Under FIFO, the ending inventory is based on the latest units purchased.

An assumption about cost flow is used

because prices usually change, and tracking which units have been sold is difficult.

The term "FOB" denotes

free on board.

The selection of an appropriate inventory cost flow assumption for an individual company is made by

management

Goods held on consignment are

never owned by the consignee.

The LIFO inventory method assumes that the cost of the latest units purchased are

the first to be allocated to cost of goods sold.

If goods in transit are shipped FOB destination

the seller has legal title to the goods until they are delivered.