Mgmt 200 Purdue Chapter 6

What are the accounting principles and controls that relate to merchandise inventory?

consistency principle, disclosure principle, materiality concept, conservatism

Disclosure principle:

A company's financial statement should report enough information for outsiders to make knowledgeable decisions about the company

Materiality concept

A company must perform strictly proper accounting only for significant items

conservatism

a company should exercise caution in reporting items in the financial statements

Controls over merchandise inventory ensures that

inventory purchases and sales are properly authorized and accounted for by the accounting system

four costing methods can be used to determine merchandise inventory costs

specific identification method, first in first out method, last in first out method, weighted average method

Specific identification method

uses the specific cost of each unit of inventory to determine ending inventor and to determine cost of goods sold

first in first out FIFO method

first costs into inventory are the first costs out to cost of goods sold; ending ivnentory is based on the costs of the most recent purchases

Weighted average method

method based on the weighted average cost per unit of inventory after each purchase.

Weighted average cost per unit is determined by

dividing the cost of goods avaialbe for sale by the number of units available for sale

The FIFO method results in

the lowest cost of goods sold and the highest gross profit when costs are rising

the LIFO method results in

the highest cost of goods sold and the lowest gross profit when costs are rising

the weighted average method generates amounts for cost of goods sold and gross profit that

fall between FIFO and LIFO if costs are contently increasing or decreasing

lower of cost or market requires that merchandise be reported in the financial statements at whichever is lower for

the historical cost of the inventory and the market value of the inventory

an adjusting entry must be recorded to write down

merchandise inventory if the market value is lower than the historical cost

an error in ending merchandise inventory creates

a whole string of errors in other related accounts

one periods ending merchandise inventory becomes

the next periods beginning merchandise inventory

inventory turnover measures

how rapidly merchandise inventory is sold

how rapidly merchandise inventory is sold is calculated as

cost of goods sold/average merchandise inventory

days sales in inventory measures

the average number of days merchandise inventory is held by the company

days sales in inventory is calculated as

365 days/inventory turnover

specific identification, FIFO, LIFO, and weighted average can be used

in a periodic inventory system

specific identification and FIFO will produce the same amounts for

ending merchandise inventory and cost of goods sold under both the perpetual and periodic inventory system

LIFO and weighted average result in different amounts for

ending merchandise inventory and cost of goods sold under the perpetual and periodic inventory systems

THERE IS MORE

UNRECORDED!!!!!!!!!!!!!!!!