Chapter 8. Inventories: Measurement

Manufacturing companies-----

-----Purchase goods that are used to produce another product

True or false: Dollar-value LIFO allows a company to combine a large variety of goods into one pool.

True DVL extends the concept of inventory pools and allows various goods to be combined into one pool.

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools.

A periodic inventory system (Select all that apply.) > continuously tracks the cost of merchandise sold. > does not continuously track the cost of merchandise sold. > continuously tracks the quantity of merchandise. > does not continuously track the quantity of merchandise.

> does not continuously track the cost of merchandise sold. > does not continuously track the quantity of merchandise.

A(n) _____ inventory system adjusts inventory at the end of each reporting period. (Enter only one word.)

periodic

Which inventory system allocates cost of goods available for sale only at the end of each reporting period? both periodic and perpetual perpetual inventory system periodic inventory system

periodic inventory system

A(n) _____ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise. (Enter only one word.)

perpetual

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

Select all that apply Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.) ending inventory. purchases. sales revenue. goods sold.

ending inventory. goods sold.

The FIFO method assumes that units sold are the _________ units acquired and that units remaining in ending inventory are the ________ units purchased.

first; last

LIFO inventory pools

simplify recordkeeping.

A DVL pool is made up of items

that are likely to have similar cost change pressures.

Items a company intends to sell in the normal course of business, has in production for future sale, or uses currently in production, are all examples of what? Investments Inventory Raw materials Work in process

inventory

Items held for sale in the normal course of business are referred to as _____. (Enter only one word.)

inventory

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600 $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200 $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

Wholesale and retail companies -----

-----Purchase goods that are primarily in completed form. Purchase goods that are primarily in completed form.

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2

Which of the following are disadvantages of unit LIFO? (Select all that apply.) > Disallowed by U.S. GAAP > Inventory pools are costly to implement > Significant recordkeeping costs > Possibility of LIFO liquidation

> Significant recordkeeping costs > Possibility of LIFO liquidation

Advantages of using LIFO inventory pools include which of the following? (Select all that apply.) > Simplify recordkeeping > Reduce the risk of LIFO layer liquidations > Account for each type of inventory separately

> Simplify recordkeeping > Reduce the risk of LIFO layer liquidations

The dollar-value LIFO (DVL) method (Select all that apply.) > increases the risk of liquidation of layers. > prevents liquidation of layers. > simplifies recordkeeping. > reduces the risk of liquidation of layers.

> simplifies recordkeeping. > reduces the risk of liquidation of layers.

Select all that apply The specific identification method (select all that apply): > would be beneficial to a company that makes fine jewelry > would be beneficial to a company that makes inexpensive products with high sales volume > matches each unit of inventory with its actual cost > is not an acceptable method of accounting

> would be beneficial to a company that makes fine jewelry > matches each unit of inventory with its actual cost

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO In a period of rising prices, FIFO results in goods with the lowest cost being sold first resulting in the lowest cost of goods sold

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in lower ending inventory.

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

The goods a wholesale company purchases in finished form are referred to as what? Merchandise inventory Finished goods Manufactured inventory

Merchandise inventory

The average cost method assumes that cost of goods sold consists of

a mixture of all the goods available for sale.

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____.

at the end of the period; each time goods are sold

In a perpetual inventory system the inventory account is

continually adjusted.

The specific identification method of inventory costing matches each unit with

its actual cost.

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

Finished goods is a type of inventory found on a _____ company's balance sheet.

manufacturing

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

The LIFO inventory method assumes that the units that remain in ending inventory are

the oldest units in inventory.

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO.

Which of the following accounts would be found on the balance sheet of a manufacturing company? work in process cost of goods sold merchandise inventory

work in process