Accounting Chapter 5 Smartbook

Recall the formula for figuring Days' Sales in Inventory.

(Ending inventory/Cost of goods sold) x 365

Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods.

-Companies using FIFO will report the highest gross profit and net income. -Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. -Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal. -Companies using FIFO will report the smallest cost of goods sold.

Assuming purchase costs are declining and a periodic inventory system is used, determine the statements below which correctly describe what is happening to cost of goods sold under FIFO, LIFO and weighted average cost flow methods.

-Companies using LIFO will report the smallest cost of goods sold. -Companies using LIFO will report the highest ending inventory on their balance sheets, as compared to companies using FIFO or weighted average. -Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold. -Companies using LIFO will pay higher taxes than companies using FIFO, assuming all else being equal.

The owner of consigned goods is called the ___________ and the one who sells goods for the owner is called the ___________.

-Cosignor -Cosignee

Which statement(s) below correctly describe(s) the relationship of cost of goods sold and ending inventory?

-Cost of goods available for sale must be allocated between cost of goods sold and ending inventory -Cost of goods sold plus ending inventory will equal the total goods available for sale

The FIFO cost flow assumption assumes that the cost of items purchased ____________ (earliest/latest) are the costs that will be transferred first to cost of goods sold on the __________ (balance sheet/income statement).

-Earliest -Income Statement

The FIFO cost flow assumption assumes that the cost of items purchased ___________ (earliest/latest) are the costs that will be transferred first to cost of goods sold on the ______________ (balance sheet/income statement).

-Earliest -Income statement

Identify the statements below that are correct regarding the advantages of the four inventory methods using a periodic inventory system.

-FIFO assigns an amount to inventory on the balance sheet that approximates its current cost. -Weighted average tends to smooth out erratic changes in costs.

There are advantages to using each of the four inventory costing methods. Identify the statements below that are correct regarding these advantages.

-FIFO assigns an amount to inventory on the balance sheet that approximates its current cost. -Weighted average tends to smooth out erratic changes in costs.

Match the cost flow assumption on the left with its definition on the right.

-FIFO: Assumes costs flow in the order incurred -LIFO: Assumes costs flow in the reverse order incurred -Weighted Average: Assumes costs flow at an average of the costs available -Specific Identification: Assumes costs flow can be specifically matched with the physical flow of items

Demonstrate how inventory costs are treated both as assets and expenses by selecting the correct statement(s) below

-Inventory items sold are considered part of cost of goods sold on the income statement. -Inventory costs are treated as an expense when they are sold. -Inventory items retained at the end of the period are considered part of Merchandise Inventory on the balance sheet.

Which of the costs below would be included in the recorded cost of merchandise inventory?

-Invoice Costs -Shipping Costs -Insurance Costs

Identify the ways in which lower of cost or market can be applied to merchandise inventory

-It can be applied to the inventory as a whole. -It can be applied to major categories of items. -It can be applied to each item individually.

The LIFO cost flow assumption assumes that the cost of items purchased ______ are the costs that will be transferred first to cost of goods sold on the ______ ______.

-Latest -Income Statement

Show your understanding of the ownership of goods in transit by completing the following statement. If goods are shipped FOB shipping point, then the ____________ (purchaser/seller) is responsible for paying freight charges and the _____________ (purchaser/seller) will not include the merchandise in their inventory.

-Purchaser -Seller

Identify the safeguards that companies implement to protect their inventory.

-Restrict access to inventory. -Control access to inventory records. -Implement security measures, such as cameras. -Match inventory received with purchase orders.

When purchase costs are __________ (rising/declining) , FIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

-Rising

Recount the methods used to assign costs to inventory and cost of goods sold under both a perpetual and a periodic system

-Specific Identification -Weighted Average -First In, First Out (FIFO) -Last In, First Out (LIFO)

Review the statements below and select the ones that are correct regarding the days' sales in inventory ratio

-The ratio is useful in evaluating liquidity of inventory. -The ratio reveals how much inventory is available in terms of the number of days' sales. -The ratio is often viewed as a measure of the buffer against out-of-stock inventory. -The ratio estimates how many days it will take to convert inventory into accounts receivable or cash.

Review the steps below that apply LCM to individual items of inventory. Place them in the correct order of occurrence.

1. List the number of units of each product 2. List the cost of each item 3. List the market price of each item 4. Compute total cost and total market value for each item 5. Compare recorded cost of each inventory item with its replacement cost. List lower of cost or market 6. Adjust inventory downward when market is less than cost

The kind of business that would use the specific identification method of inventory costing includes:

A car dealership

Determine which of the following statements is correct regarding consigned goods.

Consigned goods should be included in the consignor's inventory

When purchase costs are __________ (rising/declining) , LIFO will report the lowest cost of goods sold yielding the highest gross profit and net income.

Declining

Which of the following statements is correct regarding goods in transit?

Goods shipped FOB shipping point will be included in the buyer's inventory

Recall the formula for figuring a company's inventory turnover ratio.

Inventory turnover = Cost of goods sold/Average inventory

One identical unit is purchased on each of the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the FIFO cost flow assumption.

The June 1 at $10 and the June 2 at $15 are both sold; the July 4 unit remains in ending inventory

Assume that three identical units are purchased separately on the following three dates and at the respective costs: June 1 at $10 June 2 at $15 July 4 at $20 The company sells two units during the period. Conclude which inventory items are sold first and which unit remains in ending inventory if the company is using the LIFO perpetual cost flow assumption.

The June 2 at $15 and the July 4 at $20 are both sold; the June 1 at $10 remains in ending inventory.

Which of the following statements correctly explains what the inventory turnover ratio assesses

The inventory turnover ratio assesses how quickly a company is selling its merchandise, so that it can generate cash to pay debts.

Which of the following summarizes the weighted average cost flow assumption?

Weighted average assumes that costs flow at an average of the costs available

The adjusting entry to decrease merchandise inventory due to LCM computations, includes

credit to Merchandise Inventory

An advantage of the LIFO method is that it best matches

current costs with revenues

The _____ principle states that inventory costs are expensed as cost of goods sold when inventory is sold

expense recognition

The formula to compute cost of goods sold is

merchandise available for sale minus ending inventory

All of the following are safeguards for inventory except:

preventing risk

An advantage of the weighted average method under a periodic inventory system is that it:

smooths out erratic changes in costs