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: