Question 1

Match the inventory valuation method from the list below that is being described in each situation in letters a-e.In all cases,assume a period of rising prices.
 $$\begin{array} { | l | l | } 
\hline \text { FIFO } & \text { First in, first out } \
\hline \text { LIFO } & \text { Last in, first out } \
\hline \text { WA } & \text { Weighted average } \
\hline \text { SI } & \text { Specific identification } \
\hline
\end{array}$$ 
________ a.The method that is used if each inventory item can be matched with a specific purchase and invoice.
________ b.The method that will cause the company to have the lowest income taxes.
________ c.The method that will cause the company to have the lowest cost of goods sold.
________ d.The method that will assign a value to inventory that approximates current cost.
________ e.The method that will tend to smooth out erratic changes in costs.

Accepted Answer

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Question 2

How do the consistency concept and the full disclosure principle affect inventory valuation?

Accepted Answer

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Question 3

Identify and describe the four inventory valuation methods.

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Question 4

Explain the effects of inventory valuation methods on the cost of ending inventory,income,and income taxes.

Accepted Answer

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Question 5

Match the following terms with the appropriate definition.
-An estimate of days needed to convert the inventory available at the end of the period into receivables or cash.

Accepted Answer

Days' sales in inventory is a financial metric that estimates the average time it takes for a company to convert its inventory into sales. This is calculated by dividing the ending inventory by the cost of goods sold and then multiplying by 365 days.

Question 6

Match the following terms with the appropriate definition.
-The accounting principle that a company use the same accounting methods period after period so that the financial statements of succeeding periods will be comparable.

Accepted Answer

The consistency concept in accounting means that a company should consistently use the same accounting methods and principles from one period to the next, ensuring comparability of financial statements over time.

Question 7

Match the following terms with the appropriate definition.
-The method of assigning costs to inventory where the purchase cost of each item in inventory is identified and used to determine the cost of inventory.

Accepted Answer

The specific identification method involves tracking and assigning the actual cost of each specific item in inventory to determine the cost of goods sold and ending inventory. This method is used when the items are distinguishable from each other and have a significant cost, such as in the case of automobiles, real estate, or unique pieces of art.

Question 8

Match the following terms with the appropriate definition.
-The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely.

Accepted Answer

The conservatism principle in accounting suggests that when faced with uncertainty or multiple estimates of value, one should choose the option that results in lesser profit or asset valuation. This principle is designed to provide a more cautious and less optimistic view of a company's financial situation, avoiding overstatement of financial health.

Question 9

Explain why the lower of cost or market rule is used to value inventory.

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Question 10

Match the following terms with the appropriate definition.
-An owner of goods who ships them to another party who will then sell the goods for the owner.

Accepted Answer

The consignor is the owner of goods who sends them to another party (the consignee) to be sold on their behalf.

Question 11

Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management.

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Question 12

Match the following terms with the appropriate definition.
-A procedure for estimating inventory where the past gross profit rate is used to estimate the cost of goods sold,which is then subtracted from the cost of goods available for sale to determine the estimated ending inventory.

Accepted Answer

The Gross Profit Method estimates ending inventory by applying the past gross profit rate to current sales, subtracting estimated cost of goods sold from the cost of goods available for sale.

Question 13

Describe the internal controls that must be applied when taking a physical count of inventory.

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Question 14

Match the following terms with the appropriate definition.
-The number of times a company's average inventory is sold during an accounting period.

Accepted Answer

Inventory turnover is defined as the number of times a company's average inventory is sold during an accounting period. This metric helps businesses understand how efficiently they are managing their inventory.

Question 15

What is the effect of an error in the ending inventory balance on the accounts reported in the income statement?

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Question 16

What specific costs and deductions are used to determine the final cost of merchandise inventory? Identify all costs including the incidental costs.

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Question 17

Match the following terms with the appropriate definition.
-A method for estimating inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail prices.

Accepted Answer

The Retail Inventory Method estimates inventory value by maintaining a ratio of the cost of goods to their retail price, adjusting for sales and markdowns.

Question 18

Match the following terms with the appropriate definition.
-The required method of reporting inventory at market when market is lower than cost.

Accepted Answer

The "lower of cost or market" rule is an accounting principle that requires inventory to be reported at the lower of its historical cost or its current market value. This approach is in line with the conservatism principle, ensuring that inventory is not overstated on the financial statements.

Question 19

Match the following terms with the appropriate definition.
-One who receives and holds goods owned by another for purposes of selling the goods for the owner.

Accepted Answer

A consignee is the party in a consignment agreement who receives and holds goods owned by another party (the consignor) for the purpose of selling those goods. The consignor retains ownership until the goods are sold.

Question 20

Identify the items that are included in merchandise inventory.(In your answer address the special situations of goods in transit,consigned goods,and damaged goods.)

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Quiz 5: Inventories and Cost of Sales

How do the consistency concept and the full disclosure principle affect inventory valuation?

Identify and describe the four inventory valuation methods.

Explain the effects of inventory valuation methods on the cost of ending inventory,income,and income taxes.

Match the following terms with the appropriate definition. -An estimate of days needed to convert the inventory available at the end of the period into receivables or cash.

Match the following terms with the appropriate definition. -The accounting principle that a company use the same accounting methods period after period so that the financial statements of succeeding periods will be comparable.

Match the following terms with the appropriate definition. -The method of assigning costs to inventory where the purchase cost of each item in inventory is identified and used to determine the cost of inventory.

Match the following terms with the appropriate definition. -The principle that aims to select the less optimistic estimate when two or more estimates are about equally likely.

Explain why the lower of cost or market rule is used to value inventory.

Match the following terms with the appropriate definition. -An owner of goods who ships them to another party who will then sell the goods for the owner.

Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management.

Match the following terms with the appropriate definition. -A procedure for estimating inventory where the past gross profit rate is used to estimate the cost of goods sold,which is then subtracted from the cost of goods available for sale to determine the estimated ending inventory.

Describe the internal controls that must be applied when taking a physical count of inventory.

Match the following terms with the appropriate definition. -The number of times a company's average inventory is sold during an accounting period.

What is the effect of an error in the ending inventory balance on the accounts reported in the income statement?

What specific costs and deductions are used to determine the final cost of merchandise inventory? Identify all costs including the incidental costs.

Match the following terms with the appropriate definition. -A method for estimating inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail prices.

Match the following terms with the appropriate definition. -The required method of reporting inventory at market when market is lower than cost.

Match the following terms with the appropriate definition. -One who receives and holds goods owned by another for purposes of selling the goods for the owner.

Identify the items that are included in merchandise inventory.(In your answer address the special situations of goods in transit,consigned goods,and damaged goods.)