ACCT Chapter 6 Reporting and Analyzing Inventory

Which types of industries are likely to use the lower-of-cost-or-net realizable value (LCNRV) basis most frequently?

high-technology and fashion

Reasons to take a physical inventory if using a perpetual system:

to determine the inventory on hand at the balance sheet date

to determine the cost of goods sold for the period

Goods in transit should be included in the inventory that

has legal title to the goods

ownership of goods shipped FOB SHIPPING POINT belong to whom? and whose inventory should it be included under?

Belongs to buyer and should be included in buyers inventory

ownership of goods shipped FOB DESTINATION belong to whom? and whose inventory should it be included under?

belongs to sellers and should be included in sellers inventory

Determining inventory quantities involves 2 steps what are they?

take a physical inventory

determine ownership of goods

Taking physical inventory of goods on hand involves

actually counting, weighing, or measuring each kind of inventory on hand

When is a physical inventory usually taken?

when the business is closed or when business is slow

After a company has determined the quantity of units of inventory it applies unit costs to determine what?

the total cost of the inventory and the cost of the goods sold

what is costing of the inventory complicated?

because specific items of inventory on hand were purchased at different times

tracks the physical flow of the goods

specific identification methods

what are the 3 cost flow methods?

FIFO

LIFO

Average cost

FIFO

first in first out

assumes latest goods purchased are the first to be sold

LIFO

LiFO seldom coincides with the actual

physical flow of inventory

assumes the goods available for sale are homogenous

average cost method

under the average unit cost method the cost of goods available for sale Is allocated on the basis of the weighted

average unit cost incurred

the weighted average unit cost is applied to the units on hand and in turn this gives us

the cost of the ending inventory

what percent of companies use average cost flow

19

what percent of companies use FIFO cost flow

44

what percent of companies use LIFO cost flow

33

cost flow assumptions directly impact

net income

Assuming rising prices, LIFO yields the ---, and therefore the lowest income tax liability.

lowest taxable income

which cost flow assumption will provide the lowest inventory value.

LIFO

which cost flow assumption will provide the highest net income.

FIFO

which cost flow assumption will provide the lowest income taxes.

LIFO

when the value of inventory is less than its cost inventory is written down to its

market value

LCM is an example of

Conservatism

Under the LCM basis, market is defined as

current replacement cost, not selling price

the cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities

market

lower of cost or market

LCM

this ration tells how many times the inventory is sold during the year

inventory turn over ration

Manufactured items that are completed and ready for sale.

finished goods inventory

that portion of manufactured inventory that has begun the production process but is not yet complete

work in process

Basic goods that will be used in production but have not yet been placed in production.

raw materials

Reasons to take a physical inventory if using a periodic system:

to check the accuracy of their perpetual inventory

to determine the amount of inventory lost due to wasted raw materials shoplifting or employee theft

Two common characteristics of inventory items in a merchandising company:

they are owned by the company

they are in a form ready for sale to customers in the ordinary course of business

two steps in the reporting of inventory at the end of the period:

classification of inventory based on its completeness

determination of inventory amounts

Firms using LIFO must report the amount that inventory would increase if --

what does this do?

the FIFO method would have been used instead. enables analyst to make adjustments to compare companies that use different cost flow methods

indicates the average age of the inventory

days in inventory

in period of rising prices, the costs allocated to ending inventory using FIFO will --- while LIFo will be

approximate current costs, significantly understated

give an example of how the chose of a cost flow method can affect the income statement

cost of goods available is the same for all of the cost flow methods but ending inventory, cost of goods sold, gross profit, and net income are all different

in periods of increasing prices FIFO produce the -- income, LIFO produces the --, and AC is in the --

highest, lowest, middle

in periods of decreasing prices FIFO produce the -- income, LIFO produces the --, and AC is in the --

lowest, highest, middle

what are some of the reasons companies use various cost flow methods

income statement effects, balance sheet effects, and tax effects

For LIFO, the cost of the last goods in are the first to be assigned to

cost of goods sold

For FIFO, the accuracy of the cost of goods sold can be verified by recognizing that the first units acquired are the

first units sold

under LIFO the costs of the latest goods purchased are

the first to be the cost of goods solf

who includes consigned goods in their inventory count?

the owner of the goods

goods available for sale =

beginning inventory + purchases

If prices of inventory increase the LIFO method will use the higher costing inventory first and keep the lower costing inventory. In contrast, FIFO will use the lower costing inventory first and keep the higher costing inventory. what does this cause?

cause LIFO inventory to have a lower value than fifo and increase LIFO reserve.

Goods that were purchased FOB shipping point that were in transit on the balance sheet date should or should not be included in the inventory account

should be because company owns the goods right when they are placed on transit

Goods that were purchased FOB destination that were in transit on the balance sheet date are -- in the inventory account.

not included because company does not own the goods yet

Goods in transit from a supplier FOB destination are part of the --.

supplier's inventory

the shorter the average days in inventory the higher the --

inventory turnover

the shorter the average days in inventory the more likely the company will have

lost sales due to an inventory shortage

units sold during period =

total units available for sale - units In ending inventory

Goods in transit should be included in the inventory of the company that has the

legal title to it

determining the ownership of the goods requires what two questions

do all of the goods in the count belong to the company?

does the company own any goods that were not included in the count?

determining inventory quantity involves two steps

1. taking a physical inventory of goods on hand by weighing counting measuring each kind of inventory

2. determining the ownership of the goods

In periods of rising prices when LIFO is used, companies avoid reporting a ________ because a portion of the gross profit must be reinvested to purchase more expensive inventory items.

paper profit

the shorter the average days in inventory

the more likely the company will have lost sales due to an inventory shortage

company has a raw material inventory and a low finished good inventory

company needs to step up production

for a manufacturing company what categories are included in inventory

finished goods, work in process, and raw materials

which cost is considered a selling expense

- freight costs to acquire the goods

- sales discoutns

- freight cost to sell the goods

- sales returns

freight costs to sell the goods

Just in time inventory can be used to help companies -- inventory turnover

increase

The average length of time inventory is held before it is sold is called

days in inventory

A company with high inventory turnover likely has the --

amount of funds tied up in inventory.

minimum

When ABC Inc. sells goods for XYZ Corp and takes a commission, this is an example of

consigned goods

In transit goods shipped FOB shipping point should be included

in the buyers inventory balance

what is an example of an accounting concept of conservatism,

LCM

For LCM, Inventory is written down to its market value run the period in which

the price decline occurs

In regards to LCM, market is defined as a --- not selling price

current replacement cost