CH 6 Inventories

consistency concept

dictates that a company use the same accounting principles and methods from year to year

net realizable value

net amount that a company expects to realize (receive) from the sale of inventory, Specifically, it is the estimated selling price in the normal course of business, less estimated costs to complete and sell. -NRV = Estimated selling price − Estimated costs to complete and sell.

Work in process

that portion of manufactured inventory that has been placed into the production prosses but is not yet complete.

A company may use more than one inventory costing method concurrently. True False

true

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the value assigned to the ending inventory will be the same under LIFO and average cost flow assumptions. True False

true

If a company has no beginning inventory and the unit price of inventory is increasing during a period, the cost of goods available for sale during the period will be the same under the LIFO and FIFO inventory methods. True False

true

If the unit price of inventory is increasing during a period, a company using the LIFO inventory method will show less gross profit for the period, than if it had used the FIFO inventory method. True False

true

The specific identification method of costing inventories tracks the actual physical flow of the goods available for sale. True False

true

perpetual system

-To determine the amount of inventory lost due to wasted raw materials, shoplifting, or employee theft. -To check the accuracy of their perpetual inventory records.

Goods sold by Merchandise Is Us that are in transit (Terms: FOB destination). included or excluded

Included

Last-in, First-out (LIFO) method

Inventory costing method that assumes the cost of the latest units purchased are the first to be allocated to cost of goods sold -seldom coincides with the actual physical flow of inventory. -In periods of increasing prices it reports the lowest net income (income taxes, inventory value) -In periods of decreasing prices reports the highest net income.

specific identification method

an actual physical flow costing method in which items still in inventory are specifically tracked and costed to arrive at the total cost of the ending inventory

Weighted-average unit cost

average cost that is weighted by the number of units purchased at each unit cost

Raw materials

basic goods that will be used in production but have not yet been placed into production

The following information is available for Sunland Company at December 31, 2020: beginning inventory $177000; ending inventory $123000; cost of goods sold $2250000; and sales $1720000. Sunland's inventory turnover in 2020 is 11.47 times. 15.00 times. 18.19 times. 12.81 times.

cogs/avg inv=inv turnover cogs/[(BI+EI/2)]=inv turnover 15.00 times.

Goods held by Merchandise Is Us on consignment from another company. included or excluded

Excluded

Goods shipped to Merchandise Is Us by a supplier that are in transit (Terms: FOB destination). included or excluded

Excluded

periodic inventory system

To determine the inventory on hand at the balance sheet date, and To determine the cost of goods sold for the period.

Goods out on consignment should be included in the inventory of the consignor. True False

True

lower-of-cost-or-net realizable value (LCNRV)

a basis whereby inventory is stated at the lower of either its cost or its net realizable value -is an example of the accounting concept of conservatism which means that the best choice among accounting alternatives is the method that is least likely to overstate assets and net income.

retail inventory method

a method for estimating the cost of the ending inventory by applying a cost-to-retail ratio to the ending inventory at retail

Gross profit method

a method for estimation the cost of the ending inventory by applying a gross profit rate to net sales and subtracting estimated cost of goods sold from cost of goods available for sale

Inventory turnover

a ratio that measures the number of times on average the inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period. -It measures the liquidity of the inventory

Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company. True False

false

The expense recognition principle requires that the cost of goods sold be matched against the ending merchandise inventory in order to determine income. True False

false

The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the most recent cost. True False

false

The specific identification method of inventory valuation is desirable when a company sells a large number of low-unit cost items. True False

false

FOB (free on board) shipping point

freight terms indication that ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller

FOB (free on board) destination

freight terms indication that ownership of the goods remains with the seller until the good reach the buyer

consigned goods

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

USE OF COST FLOW METHODS IN MAJOR U.S. COMPANIES Using one of the following factors is involved:

income statement effects balance sheet effects tax effects.

Moving-average method

inventory costing method in which a new weighted-average unit cost is computed after each purchase, by dividing the cost of goods available for sale by the units on hand

First-in, first-out (FIFO) method

inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold -often parallels the actual physical flow of merchandise because it generally is good business practice to sell the oldest units first. -In periods of increasing prices reports the highest net income -In periods of decreasing prices will report the lowest net income

Average-cost method

inventory costing method that uses the weighted-average unit cost to allocate to ending inventory and cost of goods sold the cost of goods available for sale.

Just-in-time (JIT) inventory

inventory system in which companies manufacture or purchase goods only when needed for use

Finished goods inventory

manufactured items that are completed and ready for sale

days in inventory

measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover