Accounting 1 - Chapter 6

What 3 documents are used for inventory control?

1) purchase order 2) receiving report 3) vendor's invoice

what are advantages of the retail method?

1. provides inventory figures for monthly statements (if they need gross profit and operating income each month but only take physical inventory only once or twice a year) 2. as aid in taking a physical inventory

what are the two primary objectives of control over inventory?

1. safeguarding inventory from damage or theft 2. reporting inventory in the financial statements

what 2 aspects of inventory are included on the balance sheet / in the accompanying notes?

1. the method of determining the cost of inventory, FIFO, LIFO, or weighted average and 2. method of valuing inventory (cost of lower of cost or market)

advantages of the gross profit method?

1. useful for estimating inventories for monthly/quarterly financial statements 2. useful in estimating cost of inventory destroyed by fire or other disasters

physical inventory / count of inventory

A detailed listing of merchandise on hand. should be taken near year end

gross profit method

A method of estimating inventory cost that is based on the relationship of gross profit to sales.

specific identification method

An actual physical-flow costing method in which particular items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory.

The cost method that will yield an ending inventory that is closer to current prices is the

FIFO

International Financial Reporting Standards (IFRS)... permits the ____________ and __________ cost methods but prohibit _____________.

FIFO and weighted average , but prohibits LIFO

lower-of-cost-or-market (LCM)

Required method to report inventory at market replacement cost when that market cost is LOWER than recorded cost.

net realizable value

The estimated selling price of an item of inventory less any direct costs of disposal, such as sales commissions.

Which of the following is true regarding the perpetual LIFO inventory costing method? a.The cost of the units sold is the cost of the most recent purchases. b.Unit costs for each item are averaged each time a purchase is made. c.The LIFO inventory costing method must be used with the weighted average cost method. d.Costs are included in the cost of goods sold in the order in which units were purchased.

a

purchase order

authorizes purchase of the inventory from an approved vendor

number of days' sales in inventory formula

average inventory / average daily cost of goods sold the lower the days, it means inventory management improved

The inventory is added to the inventory records after three documents are reconciled. One of those documents is the a.general journal. b.receiving report. c.company check. d.sales receipt.

b

any errors in inventory will affect the..

balance sheet and income statement

A physical inventory is not used to.. a.help prevent employee theft or misuse of inventory. b.investigate major errors. c.journalize the daily transactions in the inventory account. d.compare actual inventory to book inventory.

c

The specific identification inventory method cannot be used. a.by an automobile dealer where automobiles have unique serial numbers. b.when the unit sold is identified with a specific purchase. c.when all units sold are alike. d.when each inventory unit can be specifically identified.

c

When identical units of an item are purchased at different costs a. an inventory cost flow method must be used under a periodic inventory system only. b.an inventory cost flow method is not used under either a perpetual or a periodic inventory system. c.an inventory cost flow method must be used under both a perpetual and a periodic inventory system. d.an inventory cost flow method must be used under a perpetual inventory system only.

c

when the weighted average cost method is used in a perpetual inventory system, a weighted average unit cost for each item is....

computed each tim ea purchase is made

inventory turnover formula

cost of goods sold / average inventory higher the number --> more efficient and effective in managing inventory

weighted average inventory cost flow method

cost of units sold and in ending inventory is a weighted average of the purchase costs

Inventory cost flow assumptions address accounting issues when.. .an item is purchased and it is necessary to determine its cost. b.an item is sold and it is necessary to determine its sales price. c.different units of merchandise are acquired at the same unit cost during the period. d.identical units of merchandise are acquired at different unit costs during the period.

d

Several controls are used to safeguard inventory except a.installing sensors at all exits. b.hiring security guards. c.keeping high-priced inventory behind lock and key. d.allowing all employees access to the materials warehouse

d

When the weighted average cost method is used for the perpetual inventory system, a weighted average unit cost for each item is determined a.at the end of the time period. b.each time a sale is made. c.at the beginning of the time period. d.each time a purchase is made.

d

Which of the following is true regarding consigned inventory? a.The retailer is the consignor. b.The consignee retains the title to the inventory. c.The unsold merchandise is part of the consignee's records at year-end. d.The manufacturer is the consignor.

d

The lower-of-cost-or-market method cannot be applied to

each item sold

when is revenue recorded when the periodic inventory system is used?

each time a sale is made

receiving report

establishes an initial record of the receipt of the inventory (as soon as inventory is received)

net realizable value formula

estimated selling price - direct costs of disposal

FIFO cost flow method

first units purchased are assumed to be sold, ending inventory is made up of most recent purchases

LIFO cost flow method

last units purchased are assumed to be sold and the ending inventory is made up of the first purchases

number of days' sales in inventory

measures length of time it takes to acquire, sell, and replace the inventory

inventory turnover

measures the relationship between cost of goods sold and the amount of inventory carried during the period basically.... measures number of times inventory is turned into sold goods during the year

consigned inventory

merchandise shipped by manufacturers to retailers who act as the manufacturer's selling agent

retail inventory method

method of estimating inventory, requires costs and retail prices to be maintained for the merchandise available for sale

consigner

owner of goods retains title of goods until the GOODS ARE SOLD.

Purchased inventory received is added to the inventory records after all of the following are reconciled except the

sales invoice

applying the lower of cost or market method to the total inventory always gives..

the highest value for inventory

applying the lower of cost or market method on an item by item basis always gives..

the lowest value for inventory

consignee

the retailer in a consigned inventory arrangement

specific identification inventory cost flow method

the unit sold is identified with specific purchase. not practical UNLESS each inventory unit can be separately identified

weighted average unit cost formula

total cost of units available for sale / units available for sale

The cost method that will yield an ending inventory value that is somewhere between possible high and low costs (prices) using traditional costing methods is the

weighted average inventory cost method