Chapter 6 Accounting: Merchandise Invenstory

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

Accounting principles help accountants classify and report items on the financial statements.

What are the accounting principles asscoited with merchandise inverntory?

The accounting principles associated with merchandise inventory are:

–Consistency

–Disclosure

–Materiality

–Accounting conservatism

What does the consistency principle state and mean?

states that a business should use the same accounting methods and procedures from period to period.

•Consistency helps investors and creditors compare financial statements from one period to the next.

What does a disclosure principle consist of?

financial statements should report enough information for outsiders to make knowledgeable decisions about the company.

•Information should be relevant and should be represented faithfully.

What is the materiality concept ? Or the Materiality principle?

states that a company must perform strictly proper accounting only for items that are significant to the business’s financial situation. Thinking over decision

What is the principle of conservatism?

means a business should report the least favorable figures in the financial statements when two or more possible options are presented.

•Anticipate no gains, but provide for all probable losses.

•Record an asset at the lowest reasonable amount and a liability at the highest reasonable amount.

•When there’s a question, record an expense rather than an asset.

•Choose the option that undervalues, rather than overvalues, your business.

What does good inventory ensure?

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

What are examples of good inventory controls?

Ensuring inventory is purchased with proper authorization.

•Tracking and documenting receipt of inventory.

•Recording damaged inventory properly.

•Performing physical counts of inventory annually.

•Recording and removing inventory sold.

What is Data Analytics in Accounting?

Inventory is one of the most important assets for merchandising and manufacturing companies.

•Businesses can evaluate their inventory by using data analytics tools.

What is the inventory costing method?

approximates the flow of inventory costs in a business that is used to determine the amount of cost of goods sold and ending merchandise inventory.

What are the four basic inventory costing methods are allowable by G A A P?

1.Specific identification

2.First-in, first-out (F I F O)

3.Last-in, first-out (L I F O)

4.Weighted-average

What is the specific identification method?

is an inventory costing method based on the specific cost of particular units of inventory.

What is the first-in, first-out method (F I F O)?

assumes the first units purchased are the first to be sold.

Cost of Goods Sold is based on the oldest purchases.

–Ending Inventory closely reflects current replacement cost.

What is the cost of goods available for sale?

is the total cost spent on inventory that was available to be sold during a period

What is the last-in, first-out (L I F O) method?

is the opposite of F I F O As inventory is sold, the cost of the newest item in inventory is assigned to each unit as Cost of Goods Sold.

What is the weighted-average method?

computes a new weighted-average cost per unit after each purchase.

•Weighted-average cost per unit is determined by dividing the cost of goods available for sale by the number of units available.