Ch 7 Inventory

Question 1

classification of inventory

Answer 1

raw materials
work-in-process
finished goods

Question 2

work in process goods will be recorded at the end of each accounting period, the costs will include

Answer 2

raw materials cost plus labour costs and overhead costs

Question 3

Overhead costs

Answer 3

Manufacturing costs other than the costs of raw materials and labour, such as utilities and depreciation of the manufacturing facility.

Question 4

costs for finished goods

Answer 4

when the goods are finished the costs from work in process will be transferred to the finished goods, then when they are sold they will be transferred into a cost if goods sold account

Question 5

4 kinds of transactions as the inventory moves through a manufacturer

Answer 5

1) Raw materials are purchased.
2) Raw materials are used and incorporated into the manufacture of products. These are known as work-in-process until the manufacturing process has been completed.
3) The manufacturing process is completed and the goods move from work-in-process to finished goods.
4) The goods are sold and move from finished goods to cost of goods sold.

Question 6

FOB Shipping point

Answer 6

Free On Board shipping point means that
buyer owns the inventory when it leaves the seller’s premises.

Question 7

FOB Destination

Answer 7

Free On Board Destination means that
buyer owns the inventory when it arrives at the buyer’s premises.

Question 8

Return Asset

Answer 8

Inventory that has been returned by a customer in a condition that enables it to be resold to another customer.
It’s recorded in the Estimated Returns Inventory account

Question 9

COGAS

Answer 9

Cost of Goods Available for Sale
Opening inventory plus the cost of purchases

Question 10

Periodic Inventory System

Answer 10

An inventory system in which cost of goods sold is determined by counting ending inventory, assigning costs to these units, and then subtracting the ending inventory value from cost of goods available for sale (that is, the sum of the beginning inventory plus purchases for the period).

Question 11

COGS Model for the Periodic Inventory System

Answer 11

Opening Inventory
+ Purchases
__________________________________________
Cost of goods Sold Available for Sale

• Ending Inventory (based on a physical count of inventory)
  ________________________
  COGS

Question 12

Pros and Cons of periodic inventory system

Answer 12

Pros
small upfront cost
easy to operate

Cons
have to spend more on wages during the physical count of inventory
does not account for theft
does not provide management with the most up to date info

Question 13

Perpetual Inventory System

Answer 13

An inventory system in which the cost of goods sold is determined at the time a unit is sold and ending inventory is always known, in both units and dollars.

Question 14

Inventory shrinkage

Answer 14

The losses of inventory due to spoilage, damage, theft, or waste.

Question 15

Journal entry for when the inventory is purchased periodic inventory system

Answer 15

DR Inventory
CR Cash or A/R

Question 16

Journal entry for when the inventory is purchased perpetual inventory system

Answer 16

DR Purchases
CR Cash or A/R

Question 17

Journal entry at the time of sale periodic inventory system

Answer 17

DR Cash or A/R
CR Sales Revenue
DR COGS
CR Inventory

Question 18

Journal entry at the time of sale perpetual inventory system

Answer 18

DR Cash or A/R
CR Sales Revenue

Question 19

Additional closing entry for periodic inventory system

Answer 19

no entry required unless there is shrinkage or theft to record

Question 20

Additional closing entry for perpetual inventory system

Answer 20

DR Inventory (Closing)
DR COGS
CR Purchases
CR Inventory (Opening)

Question 21

Electronic Data Interchange (EDI)

Answer 21

A link between two companies with computers allowing inventory to be ordered directly over the computer connection

Question 22

3 key points on cost formulas

Answer 22

1) Cost formulas are necessary because inventory purchase costs change.
2) COGAS is the same regardless of the cost formula used.
3) The three cost formulas result in different allocations of COGAS between ending inventory and COGS.

Question 23

3 types of cost formulas

Answer 23

1) specific identification
2) weighted average
3) first in first out (FIFO)

Question 24

the impact on cost allocation depending on usage of the periodic or perpetual inventory systems

Answer 24

• have no impact on cost allocation under either the specific identification or FIFO cost formula
• result in different cost allocations under the weighted-average cost formula

Question 25

Specific identification

Answer 25

tracking the cost of each individual item
makes sense if items sold are unique and expensive

Question 26

weighted average method

Answer 26

the price changes with each new batch of inventory (in a way the price gets diluted)
can only be used if the product is interchangeable (homogenous)

Question 27

FIFO

Answer 27

first in first out method
the first batch that is sold is sold for the price for which they received the first batch
can also only be used if the products are interchangeable

Question 28

which cost allocation method would you choose if you wanted to maximize profit?

Answer 28

FIFO

Question 29

which cost allocation method would you choose if you wanted to minimize the profit?

Answer 29

Weighted average

Question 30

Net realizable value

Answer 30

Expected selling price - costs to complete and sell the unit

Question 31

Companies are required to carry inventory at _____________

Answer 31

the lower of cost and NRV

Question 32

Inventory Write-down

Answer 32

The reduction of an inventory item’s carrying amount when its estimated net realizable value is less than its cost. A writedown is treated as an expense (part of cost of goods sold) in that period.