Ch. 9 Inventory Add Issues

Question 1

information is complete, neutral, and free from error, accurately reflecting the economic events or transactions it is intended to depict

Answer 1

faithful representation

Question 2

provide all necessary information

Answer 2

completeness

Question 3

good process to determine the accounting numbers/accounts

Answer 3

free from error

Question 4

not too positive, not too negative, just tell it as it is

Answer 4

neutrality

Question 5

ceiling =

Answer 5

net realizable value
(market cant be more than that bc its the ceiling)

Question 6

floor =

Answer 6

• normal profit margin
  (market cannot be less than this bc its the floor)

Question 7

net realizable value equation

Answer 7

net realizable value =
estimated selling price - cost to complete and sell

Question 8

If replacement cost is between celing and floor what number gets put up for market

Answer 8

replacement cost

Question 9

If replacement cost is above the ceiling what number gets put up for market

Answer 9

ceiling number

Question 10

If replacement cost is lower than the floor what number gets put up for market

Answer 10

floor number

Question 11

we measure inventory based on

Answer 11

what we paid to acquire it

Question 12

if the inventory we acquired has dropped in value what do we do

Answer 12

we recognize the expense (or loss) immediately

Question 13

what do we do if inventory has increased in value

Answer 13

do nothing

Question 14

Gross profit equation

Answer 14

Gross profit =
revenue - COGS

Question 15

Gross margin equation

Answer 15

Gross margin =
Gross profit / total seling value

Question 16

• not GAAP
• imprecise
• relies on past results
• easy way to estimate the value of ending inventory

Answer 16

gross profit method

Question 17

Gross profit as a percentage of sales equation

Answer 17

gross profit as a percentage of sales =
gross profit as a percentage of cost / (1 + gross profit as a percentage of cost)

Question 18

3 steps of the gross profit method

Answer 18

1. determine gross profit as a percentage of sales
2. estimate costs of goods sold
3. estimate ending inventory

Question 19

estimated COGS equation

Answer 19

estimated COGS =
sales * (1 - gross profit as a percentage of sales)

Question 20

how to find estimate ending inventory

Answer 20

beginning inventory XX
+ net purchases XX
= COGAFS XX
- ending inventory ?
= COGS XX

Question 21

agreement to purchase quantity of materials during a future period at an agreed upon cost

Answer 21

purchase commitments

Question 22

why would a buy enter into a purchase commitment

Answer 22

lock it in at a certain price
-chipotle-inputc: rice, beans, beef, lettuce, sells to customers:fixed in the short run

Question 23

why would a seller enter into a purchase commitment

Answer 23

agree to a purchase agreement
- lock in their demand/know how much to produce

Question 24

financial statements you write “we entered into a purchase agreement to buy all beef for $3/lb for the next 6 months

Answer 24

disclose if noncancelable and material

Question 25

record a loss if contract price is < or > market (LIFO)

Answer 25

contract > market (LIFO)

Question 26

record a loss if contract price < or > NRV (other methods)

Answer 26

contract > NRV (other methods)

Question 27

if you discover an inventory error in the same period as it occurred what do you do

Answer 27

fix it

Question 28

if you discover an inventory error in the future what do you do

Answer 28

need to correct the error in the current period

Question 29

go back and re-do previous year accounting

Answer 29

retrospective restatement

Question 30

for companies that use a cost method other than LIFO or the retail inventory method, we report inventory at the lower of

Answer 30

cost or NRV

Question 31

for companies that use LIFO or the retail inventory method, we report invnetory at the lower of

Answer 31

cost or market

Question 32

effects of an inventory write down are to reduce _____ and ________

Answer 32

reduce reported inventory and reduce net income

Question 33

the estimated selling price of the inventory in the ordinary course of business reduced by reasonably predictable costs of completion, disposal, and transportation

Answer 33

NRV

Question 34

the inventorys current replacement cost (by purchase or reproduction)

Answer 34

market

Question 35

using ____ in periods of rising costs is that it produces higher COGS and lowers net income and income taxes

Answer 35

LIFO

Question 36

a company changing to ___ usually does not report the change for past inventory

Answer 36

LIFO

Question 37

if an inventory error is discovered 2 years later what do you do

Answer 37

nothing the error has self corrected

Question 38

Floor equation

Answer 38

Floor = NRV - normal profit margin