Chapter 6

Question 1

Inventory cost flow assumption method in which each inventory item that is sold is matched with its purchase cost. This method is most practical when inventory consists of relatively few, expensive items, particularly when individual units can be identified with serial numbers — for example, motor vehicles.

Answer 1

SPECIFIC IDENTIFICATION

Question 2

Inventory cost flow assumption method assumes that the first goods purchased are the first ones sold. This cost flow assumption makes sense when inventory consists of perishable items such as groceries and other time-sensitive goods.

Answer 2

FIRST IN, FIRST OUT (FIFO)

Question 3

Inventory cost flow assumption method in which goods purchased on different dates are mixed with each other.

Answer 3

WEIGHTED AVERAGE

Question 4

Provides a detailed listing of type, amount, and total cost of all types of inventory held at a particular point in time. The sum of the balances on each inventory record card would always equal the ending amount recorded in the general ledger account.

Answer 4

MERCHANDISE INVENTORY SUBLEDGER

Question 5

One method used to estimate cost of goods sold and ending inventory that assumes that the percentage of gross profit on sales remains approximately the same from period to period. Therefore, if this percentage is known, the dollar amount of ending inventory can be estimated. First, gross profit is estimated by applying the gross profit percentage to sales (sales x percentage given). From this, cost of goods sold can be derived, namely the difference between sales and gross profit. Cost of goods available for sale can be determined from the accounting records (opening inventory + purchases). The difference between cost of goods available for sale and cost of goods sold is the estimated value of ending inventory.

Answer 5

GROSS PROFIT METHOD

Question 6

Another method used to estimate cost of goods sold and ending inventory. It can be used when items are consistently valued at a known percentage of cost. The cost of goods available for sale is first converted to its retail value (the selling price). Based on this, opening inventory, purchases, and cost of goods available can be restated at retail. Cost of goods sold can then be valued at retail, meaning that it will equal sales for the period. From this, ending inventory at retail can be determined and then converted back to cost using the mark-up.

Answer 6

RETAIL METHOD

Question 7

The ratio of retail value (or selling price) to cost (retail value divided by cost)

Answer 7

MARK UP

Question 8

Cost of Goods Sold / Average Merchandise Inventory
The average merchandise inventory is the beginning inventory plus the ending inventory divided by two.
Helps determine how quickly a company is able to sell its inventory.
The higher the turnover, the better because this means the business sells its inventory at a faster rate.

Answer 8

MERCHANDISE INVENTORY TURNOVER

Question 9

The ability to convert assets, such as merchandise inventory, into cash.

Answer 9

LIQUIDITY

Question 10

Two components necessary to determine the inventory value disclosed on a corporation’s balance sheet.

Answer 10

Performing a physical inventory count at the end of an accounting period
Assigning the most appropriate cost to this quantity of inventory.

Question 11

An additional adjusting entry to be considered at the end of the accounting period when calculating cost of goods sold and ending inventory values for the financial statements. Generally accepted accounting principles require that inventory be valued at the lesser amount of itslaid-down costand the amount for which it can likely be sold — its net realizable value (NRV)

Answer 11

LOWER OF COST AND NET REALIZABLE VALUE