Which principle states that businesses should use the same accounting methods and procedures from period to period? The consistency principle states that a business should use the same accounting methods and procedures from period to period.

What does the disclosure principle require? The disclosure principle states that a business has to release financial statements with enough information for outsiders to make decisions relating to the company (ie investing).

Discuss the materiality concept. Is the dollar amount that is material the same for a company that has annual sales of $10,000 compared with a company that has annual sales of $1,000,000? The materiality concept states that a company must perform strictly proper accounting only for items significant to the financial situation of the business. No, the dollar amount that is material not the same for a company with annual sales of $10,000 as compared to one with $1,000,000. To the $10,000 company, the dollar is valued more.

What is the goal of conservatism? The goal of conservatism is to encourage a business to report the more modest figures in financial statements when two or more possible numbers are presented, and in doing so, report realistic figures and never overstate assets or net income.

Discuss some measures that should be taken to maintain control over merchandise inventory. Ensuring merchandise inventory is only purchased when it is authorized, tracking and documenting purchased inventory, recording damaged inventory, and taking a physical count of inventory all help maintain control over merchandise inventory.

Under a perpetual inventory system, what are the four inventory costing methods and how does each method determine ending merchandise inventory and cost of goods sold? SPID (specific identification method) takes each leftover, individual inventory and finds the total of all of them. FIFO (first in first out) assumes the first items bought were the first items sold, and therefore, the supplies bought last are the ending merchandise inventory. LIFO (last in first out) assumes the last items bought were the first items sold, and therefore, the first items bought are the ending inventory. Weighted average takes the average cost of goods bought and multiplies that by the amount of inventory.

When using a perpetual inventory system and the weighted-average inventory costing method, when does the business compute a new weighted-average cost per unit? The business calculates a new weighted-average cost per unit whenever new supplies were bought.

During periods of rising costs, which inventory costing method produces the highest gross profit? During periods of rising costs, the FIFO method produces the highest gross profit.

What does the lower-of-cost-or-market (LCM) rule require? The LCM rule requires merchandise inventory should be reported in the financial statements at whichever is lower (historical cost or market vale).

What account is debited when recording the adjusting entry to write down merchandise inventory under the LCM rule? Cost of goods sold should be debited and merchandise inventory should be credited.

What is the effect on cost of goods sold, gross profit, and net income if ending merchandise inventory is understated? If merchandise inventory is understated, COGS is overstated, gross profit is understated, and net income is understated.

When does an inventory error cancel out, and why? An inventory error cancels out when the ending inventory is moved to the beginning inventory in the next period, in which then, inventory is recounted and corrected.

How is inventory turnover calculated, and what does it measure? Inventory is calculated by dividing the average merchandise inventory by the cost of goods sold. It measures how quickly supplies are being sold.

How is days’ sales in inventory calculated, and what does it measure? Days’ sales in inventory is calculated by dividing the inventory turnover rate by 365. It measures the average number of days that inventory is held by a company in stock.

When using the periodic inventory system, which inventory costing methods always produce the same result as when using the perpetual inventory system? FIFO always produces the same result because it sells the oldest inventory, so it doesn’t matter when it is calculated.

When using the periodic inventory system and weighted-average inventory costing method, when is the weighted-average cost per unit computed? The weighted average method in a periodic system is calculated at the end of the period.