Chapter 10

Question 1

Periodic System of Inventory definition:

Answer 1

Company gets inventory balance and cogs at end of accounting period

Question 2

Perpetual System of Inventory definition:

Answer 2

Company continually updates inventory after each purchase and sale

Question 3

Ending Inventory is comprised of what 2 types of goods:

Answer 3

Goods in physical possession
Goods in transit

Question 4

FOB means?

Answer 4

Free On Board

Question 5

FOB Shipping Point definition:

Answer 5

Title passes from seller to buyer when goods are shipped

Question 6

FOB Destination definition:

Answer 6

Title passes from seller to buyer when goods are received by buyer

Question 7

Freight-In Cost definition:

Answer 7

Transportation costs to bring inventory to a location

Question 8

Freight-Out Cost definition:

Answer 8

Transportation Costs to move inventory to the seller

Question 9

Gross vs Net Methods of Inventory Discounts:

Answer 9

Gross: Recognize discount when it happens
Net: Recognize discount immediately/assume you will take the discount

Question 10

4 Inventory Allocation Methods:

Answer 10

Specific Identification Method
Moving-Average Method
First in First out (FIFO)
Last in Last out (LIFO)

Question 11

Specific Identification Method definition:

Answer 11

Company identifies each unit and tracks costs associated with each unit (used best when companies sell high $ products with low sales volume)

Question 12

Moving-Average Method definition:

Answer 12

Determines an average cost for units on hand and applies that average to the next sale to determine COGS (best for firms selling high volume of similar products)

Question 13

FIFO (First In First Out) Method definition:

Answer 13

Oldest costs to COGS
Newest costs to End Inv

Question 14

LIFO (Last In Last Out) Method definition:

Answer 14

Newest costs to COGS
Oldest costs to End Inv

Question 15

Does IFRS allow LIFO?

Answer 15

No

Question 16

Why is LIFO used in the US?

Answer 16

Tax benefits

Question 17

Do firms normally measure inventory internally using LIFO?

Answer 17

No, they use FIFO usually

Question 18

FIFO and LIFO in Inflation

Answer 18

FIFO Low COGS High EI
LIFO High COGS Low EI

Question 19

FIFO and LIFO in Deflation

Answer 19

FIFO High COGS Low EI
LIFO Low COGS High EI

Question 20

LIFO Reserve Account definition:

Answer 20

An allowance account that is a contra asset account to inventory. It reduces inventory from FIFO to LIFO

Question 21

How do we find the LIFO Reserve?

Answer 21

We find the difference between the inventory measured in both FIFO and LIFO

Question 22

LIFO Effect definition:

Answer 22

Income statement adjustment in the LIFO reserve account/the change in the LIFO Reserve during the year

Question 23

Lower of Cost or Market Rule definition:

Answer 23

If a measure of the market value of inventory falls below its cost, the company must report inventory at the lower of its cost or market value

Question 24

3 Steps to Lower of Cost or Market Rule:

Answer 24

1. Determine market value of inventory
2. Compare market to cost as determined using inventory allocation method
3. Record write down if necessary

Question 25

Direct vs Indirect Methods of writing off inventory:

Answer 25

COGS Loss Inv
Inv Allow Inv

Question 26

LCM Table for FIFO

Answer 26

Group/SP/Disp/NRV(Market)/Cost/Units/TMV/TC/LCM

Question 27

LCM Table for LIFO

Answer 27

Group/SP/Disp/NPM/Ceiling(SP-Disp)/Floor(NRV-NPM)/Market(CRC if between)/Cost/Units/TMV/TC/LCM