Accounting - Chapter 8
Is created whenever units are acquired at a different per-unit cost
(new) cost layer
In periods of rising prices, which of the following best describes the rationale for a company to use an inventory method other than LIFO
A company using a method other than LIFO will report higher net income
When the average-cost method is in use, the average cost of all units in inventory is computed when?
After every purchase
Is particularly common when the company has a large number of identical inventory items that were purchased at different prices; the seller makes an assumption as to the sequence in which units are withdrawn from inventory
Cost flow assumption
Title does NOT pass until the shipment reaches its destination and the goods are owned by the seller while in transit
F.O.B destination
Title passes at the point of shipment and the goods are the property of the buyer while in transit
F.O.B shipping point
The ____ method is based on the assumption that the most recent purchases should be in the statement of financial position (balance sheet)
FIFO
Under the FIFO method, what is correct?
FIFO moves the oldest costs to the income statement when inventory is sold.
TRUE OR FALSE? All 3 methods -- LIFO, FIFO, and average cost are acceptable for use in a company's financial statement, but only LIFO is acceptable in the company's income tax return.
False
A technique for estimating the cost of goods sold and the amount of inventory on hand
Gross profit method
Where in the balance sheet is inventory listed and why?
Immediately after accounts receivable because it's just one step further removed from conversion into cash than customer receivables
Using a cost flow assumption is particularly common in which of the following circumstances? Info to apply the specific identification method is not available The company has a large number of identical/similar items that were purchased at different prices
Info to apply the specific identification method is not available The company has a large number of identical/similar items that were purchased at different prices
What do users of financial statements find useful when evaluating the liquidity of the company's inventory
Inventory turnover
In a period of rising prices, the ___ inventory method comes the closest to matching income statement revenues and current costs.
LIFO
The most widely used inventory method is
LIFO
Which generally accepted inventory method comes closest to matching the current selling price with the cost of replacing the inventory items sold?
LIFO
Income tax's rule stating that a corporation is only allowed to use LIFO in its income tax return if they are also using LIFO in its financial statements
LIFO conformity requirement
In a period of rising prices, the inventory method that has the greatest income tax benefit to company is the
LIFO method
The inventory method that moves the oldest costs into the income statement as goods are sold is the
LIFO method
The primary benefit of LIFO method in periods of rising prices is that
LIFO reduces a company's income tax burden
The cost of merchandise purchased during the year is debited to a Purchases account rather than to the Inventory account
Periodic inventory system
Acceptable only when the actual costs of individual units of merchandise can be determined from the accounting records
Specific identification
Best suited for unique inventories of high-priced items and low-volume items; only method that exactly parallels the physical flow of the merch
Specific identification
In a perpetual inventory system, as inventory is sold, what occurs within the accounting system?
The cost is removed from the Inventory account and transferred to the Cost of Goods Sold account in the income statement at the time of sale.
TRUE OR FALSE? The average-cost method eliminates the need to apply either the LIFO or the FIFO inventory method
True
TRUE OR FALSE? The cost of inventory generally does not include any cash discounts taken.
True
In what circumstance is the specific identification method appropriate?
When the individual cost of each specific item can be identified in the accounting records
When should a sale be recorded?
When title to the merchandise passes to the buyer
Reduces both the carrying amount of the inventory in the balance sheet and the net income of the current period
Write-down
In a company's statement of financial position (balance sheet), inventory is usually presented
as a current asset immediately following receivables
Assuming changing prices, identical items will have the same accounting values only under the
average cost method
Inventory is presented in the company's balance sheet as a
current asset
A cost flow assumption is most appropriate when a large number of ____ items were purchased at different prices.
identical/homogenous
Inventory costs generally flow from the balance sheet to the what when they are sold?
income statement
Consists of all good owned and held for sale to customers in a merchandising company
inventory
a system that delays the purchase of inventory and immediately places acquired inventory into the production prices
just-in-time inventory system
Inventory is s expected to be converted into cash within the company's
operating cycle
In periods of rising prices, using an inventory method other than LIFO will result in
payment of higher income taxes
A perpetual inventory system is one in which
purchases are added to inventory and subtracted from inventory as these transactions occur
When a cost flow assumption is used, the seller makes an assumption about the sequence in which items are
sold/withdrawn
The inventory method that is most appropriate for high-dollar items that are unique and whose cost can be individually determined is the
specific identification method
Consistency as applied to inventory accounting means that
the company is expected to apply that method from year to year
The average cost of inventory is calculated by dividing
the total cost of goods available for sale by the number of units in inventory
Applying the average-cost method, a new average is calculated when?
when inventory is purchased
