Chapter 6 powerpoint

Question 1

Merchandiser inventory classication

Answer 1

merchandise inventory

Question 2

Three manufacturer inventory classifications

Answer 2

Finished goods inventory

work in process

raw materials

Question 3

finished goods inventory

Answer 3

maunfactured items that are completed and ready for sale

Question 4

work in process

Answer 4

manufactured inventory items that are completed and ready for sale

Question 5

Raw materials

Answer 5

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

Question 6

Just in time inventory (JIT)

Answer 6

Companies manufacture or purchase goods just in time for use

Question 7

Two reasons to count physical inventory in a periodic system

Answer 7

To determine the inventory on hand at the balance sheet date

To determine the cost of goods sold for the period

Question 8

Two steps in taking a physical inventory count

Answer 8

1. Taking a physical inventory of goods on hand
2. determining the ownership of goods

Question 9

FOB shipping point

Answer 9

buyer pays freight costs

ownership goes to buyer once given to mail carrier

Question 10

FOB destination

Answer 10

Seller pays freight costs

ownership goes to buyer when mail carrier drops off goods to buyer

Question 11

Consigned goods

Answer 11

Goods of other parties that agree to be sold with a fee, but without taking ownership of goods

Question 12

Inventory

Answer 12

assets that will be resold

Question 13

Cost of inventory

Answer 13

all the costs incurred to build the inventory

eg. factory, machinery, labor

Question 14

Inventory and COGS

Answer 14

all costs necessary to acquire the inventory

Question 15

Costs related to the sale

Answer 15

Not required for inventory acquisition should be classified as selling expenses and NOT in inventory

ex. freight-out

Question 16

Lower of Cost or Market

Answer 16

US GAAP requires that all inventory be measured at lower of cost or market (replacement cost)

DOES NOT ALLOW upward revaluation of inventory

*consistent with conservatism

Question 17

Specific Identification

Answer 17

When a company can positively identify which particular units it sold and which are still in ending inventory

Keep records of original costs

Sells a limited variety of high-cost items

Question 18

In periods of increasing prices, what records highest net income?

Answer 18

FIFO

Question 19

In periods of decreasing prices, what reports the highest net income?

Answer 19

LIFO

Question 20

In periods of increasing prices, costs allocated to ending inventory using FIFO will __________________

Answer 20

approximate current costs

Question 21

In periods of increasing prices, costs allocated to ending inventory using LIFO will ___________________

Answer 21

be significantly understated

Question 22

LIFO reserve helps what?

Answer 22

to enhance comparability across companies, as users of financial statements can see difference in two inventory methods

Question 23

lower taxes?

Answer 23

LIFO during increasing prices

Question 24

Inventory Turnover Ratio

Answer 24

Cost of Goods Sold / Average Inventory

An indication of how quickly a company sells its good

higher = better

Question 25

Days in inventory

Answer 25

365 days / Inventory Turnover Ratio

Measures average number of days inventory is held

Lower is better

Question 26

Average inventory formula

Answer 26

(Beginning inv. + Ending inv.) / 2

Question 27

Understate Beginning inventory:

Answer 27

COGS = understated

Net income = overstated

Question 28

Overstate beginning inventory

Answer 28

COGS = Overstated

Net income = understated

Question 29

Understate ending inventory

Answer 29

COGS = overstated

Net income = understated

Question 30

Overstate ending inventory

Answer 30

COGS = understated

Net income = overstated

Question 31

Ending inventory overstated (balance sheet)

Answer 31

Assets = overstated

Liabilities = no effect

SE = Overstated

Question 32

Ending inventory understated (Balance Sheet)

Answer 32

Assets = understated

Liabilities = No effect

SE = understated