Ch 7 Study

lower of cost to market

inventory must be reported at market value when market is lower than cost

Applying the lower of cost or market rule results in inventory being reported at the

market value if lower than cost

The costs of carrying inventory include the costs of

obsolescence, storage, theft, spoilage

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest, newest

what is merchandise inventory

products acquired in a finished condition, ready for sale without further processing

What goes on the income statement

sales revenue, cost of goods sold, gross profit, operating expenses, net income

The cost of delivering goods to customers is a

selling expense

FIFO assumes the inventory costs flow out in the order that

the goods are received

LIFO assumes the inventory costs flow out in

the opposite of the order the goods are received

When costs are rising, as they were in our example, ______ produces a larger inventory value (making the balance sheet appear to be stronger) and a smaller cost of goods sold (resulting in a larger gross profit, which makes the company look more profitable)

FIFO

Which inventory costing method uses the oldest cost for Cost of Goods Sold on the income statement and the newest cost for Inventory on the balance sheet?

FIFO (assumes the older items are sold first as Cost of Goods Sold and the newer items remain in Inventory. LIFO assumes the newer, more recently purchased items are sold first)

Which of the following may occur with a higher inventory turnover ratio?

Reduction in obsolescence and inventory storage costs

Do you want a smaller or bigger cost of goods sold for a higher gross profit

Smaller

Which of these inventory accounting methods are acceptable under US GAAP?

Weighted average, specific identification, LIFO, FIFO

How to calculate days to sell

365/inventory turnover ratio

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is ______.

65

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be

73 days

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

What effect does the inventory costing method have on the income statement? The inventory methods affects the amount of the

Cost of Goods Sold, Gross Profit, Income from Operations, Income before Income Tax Expense, Income Tax Expense and Net Income

Which inventory costing method minimizes income taxes?

LIFO

Which of the following income statement line items are affected by the inventory method chosen?

Net Income, Income Tax Expense, Income before Income Tax Expense, Income from Operations, Gross Profit (NOT sales)

how to calculate inventory turnover ratio

cost of goods sold/average inventory

The specific identification method individually

identifies and records the cost of each item sold as Cost of Goods Sold, requires accountants to keep track of the purchase cost of each item