Chapter 6

Question 1

Consistency Principle

Answer 1

-A business should use the same accounting methods and procedures from period to period

Question 2

Disclosure Principle

Answer 2

-A business’s financial statements must report enough information for outsiders to make knowledgeable decisions about the company

Question 3

Materiality Concept

Answer 3

-A company must perform strictly proper accounting only for items that are significant to the business’s financial situation

Question 4

Conservatism

Answer 4

-A business should report the least favorable figures in the financial statements when two or more possible options are presented

Question 5

Beg. Inventory January 1st: 100 units x $10 = $1,000
Purchases on January 15th: 100 units x $12 = $1,200

Using the perpetual system and FIFO method, what is the Cost of Goods Sold if we sell 125 units on January 20th? Please show work.

Answer 5

-FIFO (First in First Out)
100 units ($10)= $1000
25 units ($12)= $300

COGS= $1300

Question 6

Beg. Inventory January 1st: 100 units x $10 = $1,000
Purchases on January 15th: 100 units x $12 = $1,200

Using the perpetual system and LIFO method, what is the Cost of Goods Sold if we sell 125 units on January 20th? Please show work.

Answer 6

-LIFO (Last in First Out)
100 units ($12)=  $1200
25 units ($10)= $250

COGS= $1450

Question 7

When inventory costs are rising, ________ results in the highest cost of goods sold.

Answer 7

-LIFO

Question 8

When inventory costs are rising, ________ results in the lowest net income.

Answer 8

-LIFO

Question 9

ABC Company paid $3,000 for its merchandise inventory. At the end of the accounting period, the merchandise inventory can now be replaced for $2,700 and this decline appears to be permanent. Write the journal entry to write down the inventory to LCM:

Answer 9

-Debit COGS $300 and Credit Merchandise Inventory $300

To write Merchandise Inventory Down to Market Value

Question 10

If the ending merchandise inventory is overstated, then cost of goods sold is _____________, and the net income is _______________.

Answer 10

• COGS is understated

- Net Income is overstated

Question 11

If the ending merchandise inventory is understated, then cost of goods sold is ____________, and the net income is _______________.

Answer 11

• COGS is overstated

- Net income is understated

Question 12

What is the formula for inventory turnover?

Answer 12

• Measures the number of times a company sells its average level of merchandise inventory during a period
• Inventory Turnover= Cost of Goods Sold/(Average Merchandise Inventory)

Question 13

What is the formula for days’ sales in inventory?

Answer 13

• Measures the average number of days that inventory is held by a company
• Days’ Sales in Inventory= 365 Days/Inventory Turnover