Lesson 7 (Inventory)

Question 1

Which financial statement accounts are affected by the sale of a product on the income statement ?

Answer 1

1. sales revenue
2. cost of goods sold

Question 2

which financial statement accounts are affected by the sale of a product on the balance sheet ?

Answer 2

1. accounts receivable
2. inventory

Question 3

when do the inventory costs get expensed on the income statement ?

Answer 3

only when the inventory is sold

Question 4

expenses are to be recorded in the same year they help generate revenues. revenue is earned when the sale is made, thus the expense cost of goods sold must be recorded when ?

Answer 4

in the same year they help generate revenues

Question 5

are goods being shipped from the seller to the buyer and are thus on board a truck, train, ship or plane
what is this ?

Answer 5

goods in transit

Question 6

ownership of goods passes to buyer as soon as the goods are shipped
which common shipping term is this ?

Answer 6

FOB (Free on Board) Shipping point

Question 7

ownership of goods remains with the seller until the goods actually reach the buyer
which common shipping term is this ?

Answer 7

FOB (Free on Board) Destination point

Question 8

represent inventory that was purchased and then returned to the seller (same idea as a sales return but from the buyers perspective)
what is this ?

Answer 8

purchase returns

Question 9

represent discounts received for paying your suppliers early (same idea as a sales discount but from the buyers perspective)
what is this ?

Answer 9

purchase discounts

Question 10

cost of transporting (shipping) inventory you have purchased to you
what is this?

Answer 10

freight in

Question 11

represents the cost of transporting inventory to your customers but where you have agreed to pay the shipping costs
what is this ?

Answer 11

freight out

Question 12

What are the 3 inventory cost flow methods ?

Answer 12

1. FIFO (first in, first out)
2. LIFO (last in, first out)
3. Weighted average (average cost)

Question 13

FIFO, LIFO, Weighted average is used to calculate what ?

Answer 13

ending inventory on the balance sheet and cost of goods sold on the income statement

Question 14

What does FIFO stand for ?

Answer 14

First in, First Out

Question 15

According to FIFO what costs are assigned to cost of goods sold, and what costs are assigned to ending inventory?

Answer 15

-oldest costs are assigned to cost of goods sold
-newest costs are assigned to ending inventory

Question 16

What does LIFO stand for ?

Answer 16

Last in, First out

Question 17

According to LIFO what costs are assigned to cost of goods sold and what costs are assigned to ending inventory ?

Answer 17

-newest costs assigned to cost of goods sold
-oldest costs assigned to ending inventory

Question 18

Weighted average assumes what ?

Answer 18

all inventory items have the same cost. (old or new units does not matter)

Question 19

This ‘same cost’ in the weighted average is called ?

Answer 19

weighted average cost per unit

Question 20

FIFO LIFO Weighted average
These cost flow assumptions do not have to be consistent with the ?

Answer 20

actual flow of goods

Question 21

FIFO LIFO Weighted average
These methods simply do what ?

Answer 21

assume flows of costs in order to calculate the amount of ending inventory and cost of goods sold

Question 22

During inflation which method will show the highest net income ?

Answer 22

FIFO

Question 23

Which method will show the highest total assets during inflation ?

Answer 23

FIFO

Question 24

Which method will give an income tax advantage during inflation ?

Answer 24

LIFO

Question 25

Which method shows ending inventory at its most acquisition costs during inflation or deflation ?

Answer 25

FIFO

Question 26

Which method will show the highest net income during deflation ?

Answer 26

LIFO

Question 27

Which method will show the highest total asset during deflation ?

Answer 27

LIFO

Question 28

Which method will give an income tax advantage during deflation ?

Answer 28

FIFO

Question 29

required that companies use the same accounting methods period after period so the financial statements of succeeding periods will be comparable
what is this ?

Answer 29

consistency principle

Question 30

measures the number of times an average the inventory is sold during a period
what is this ?

Answer 30

inventory turnover

Question 31

What’s the equation for inventory turnover ?

Answer 31

Cost of Goods Sold / Average Inventory = Inventory Turnover

Question 32

How do you calculate average inventory ?

Answer 32

Inventory at Jan 1 + Inventory at Dec 31 / 2 = Average inventory

Question 33

is an indication as to how quickly the company is selling its inventory
what is this ?

Answer 33

inventory turnover ratio
(higher the better)

Question 34

measures the number of days on average between buying the inventory from suppliers and selling it to customers
what is this ?

Answer 34

number of days sales n inventory

Question 35

What’s the equation for number of days sales in invneotory ?

Answer 35

365 / Inventory turnover = Number of days sales in inventory
(lower is better)

Question 36

measures the number of days on average between buying inventory from suppliers and collecting cash from selling inventory to customers
what is this ?

Answer 36

operating cycle

Question 37

How to calculate operating cycle ?

Answer 37

Number of days sale in inventory + average collection period = operating cycle

Question 38

measures the percentage of the sales price of inventory that is gross profit
what is this ?

Answer 38

gross margin rate (gross profit rate)

Question 39

How to calculate Gross margin rate (gross profit rate) ?

Answer 39

Gross margin (profit) / Net sales revenue = gross margin rate
(higher is better)