Chapter 7

Question 1

The need for physical inventory count

Answer 1

*Physical inventory must still be counted at the end of the period regardless of periodic or perpetual system
–This will identify inventory shrinkage due to theft, spoilage, etc.

*Good internal control procedures must be in place
–i.e. pre-numbered tags, counting in teams by employees that do not have responsibility for the record-keeping or custody of inventory

Question 2

Inventory System: Periodic Inventory System

Answer 2

• Useful for high-volume, low-priced items.
  –Examples: drug stores, hardware stores, etc., cannot readily determine the cost of goods at the time of sale
• Periodic System
  –Does not keep an updated inventory record
  –No entry to record the reduction in inventory at the time of sale
  –End of the period
• Hand count the inventory
  *Calculate the cost of goods sold

Question 3

Inventory System: Perpetual Inventory

Answer 3

• Provides up-to-date inventory records
• Provides up-to-date records for COGS

Question 4

Inventory Cost

Answer 4

Include all costs incurred to bring the asset to a useable or saleable condition, such as:
*Invoice price less purchase discount less purchaser return and allowance

*Plus Freight charges
*Plus incidental costs
*Plus Inspection costs
*Plus Preparation costs
*Not HST!

Question 5

Debit & Credit Memoranda

Answer 5

Memoranda is used to notify the buyer or seller that an adjustment is being made for return, allowance, or an inventory error.

DEBIT MEMORANDA
- Issued by buyer to DR a A/P account-recording a “debit” to the recipient’s account

CREDIT MEMORANDA
- Issued by the Seller to CR a customer’s A/R
- Sales return and allowance is DR
- The accounts receivable is credited by the seller

Question 6

Cost-Flow Assumptions: Three methods

Answer 6

The method for determining costs should result in the fairest matching of costs against revenues. The assumed flow of goods can differ from the actual flow.

• FIFO
• WACC
• Specific Identification

Question 7

Specific Identification

Answer 7

• Exactly matches costs and revenues on the statement of earnings
• Tracks the actual physical flows

Question 8

FIFO

Answer 8

• Ending Inventory on the balance sheet includes the most current cost
• Approximates the physical flow of most retailers

Question 9

Average

Answer 9

• COGS on the statement of earnings includes more current costs than FIFO
• Smooths the effects of price changes by assigning all units the same AC

Question 10

Inventory Turnover Ratio

Answer 10

COGS / AVERAGE INVENTORY