Chapter 6

Question 1

an owner of inventory goods who ships them to another party who will then find a buyer and sell the goods for the owner the consignor retains title to the goods while they are held offsite by the considnee

Answer 1

consignor

Question 2

consignee

Answer 2

one who receives and holds goods owned by another party for the purpose of acting as an agent and selling the goods for the owner the consignee gets paid a fee from consignor for finding a buyer

Question 3

What is NRV

Answer 3

Net realizable value

Question 4

what is the definition of NRV

Answer 4

the expected sales price of an item minus the cost of making the sale

Question 5

the selling price of merchandise inventory

Answer 5

retail price

Question 6

cost of inventory cacluations

Answer 6

purchase price minus discounts provided by supplier ( trade discounts/rebates) + additional costs necessary to put inventory in a place and condition for sale = cost of inventory

Question 7

examples of additional incidental costs that are to be added to inventory

Answer 7

• import duties
• transportation-in (freight costs)
• storage
  -insurance
  -handling costs
• costs incurred in an aging process where the aging contributes to the value of the product produced ( for example aging of wine and cheese)

Question 8

what does accounting principles imply

Answer 8

the incidental costs are assigned to every unit purchased - this is so that all inventory costs are properly matched against revenue in the period when inventory is sold

Question 9

materiality principle

Answer 9

states that an amount may be ignored if its effect on the financial statements is not important to their users. Financial statement preparers need to assess whether the item would impact the decision of a user

Question 9

what does materiality principle rely on

Answer 9

relied on by some companies as the reason some incidental costs are not allocated to inventory

Question 10

physical inventory count

Answer 10

to count merchandise inventory for the purpose of reconciling goods actually on hand to the inventory control account in the general ledger; also called taking an inventory

Question 10

internal controls

Answer 10

the policies and procedures used to protect assets, ensure reliable accounting, promotes efficient operations, and urge adherence to company policies

Question 11

COGS caculations

Answer 11

beginning inventory + purchases minus ending inventory = COGS

Question 12

what is FIFO

Answer 12

First-in, first-out

Question 13

what are the three key methods that are used in assigning costs to inventory and cost of goods sold under perpetual inventory system

Answer 13

• First-in, first-out FIFO
  -moving weighted average
• specific identification

Question 14

what does FIFO mean

Answer 14

the pricing of an inventory under the assumption that inventory items are sold in the order acquired; the first items received are the first items sold

Question 15

what is moving weighted average

Answer 15

a perpetual inventory pricing system in whick the unit cost in inventory is recalculated at the time of each purchase by dividing the total cost of goods available for sale at that point in tie by the corresponding total units available for sale the most current moving weighted average cost per unit is multiplied by the units sold to determine cost of goods sold

Question 16

specific identification

Answer 16

the pricing of an inventory where the purchase invoice of each item in the ending inventory is identified and used to determine the cost assigned to the inventory

Question 17

the consistency principle

Answer 17

the accounting requirement that a company use the same accounting policies period after period so that the financial statements of succeeding periods will be comparable

Question 18

do companies have to use one method

Answer 18

no the consistency principle does not require a company to use one method exclusively

Question 19

principle of faithful representation

Answer 19

the accounting principle that requires information to be complete, neutral, unbiased, and free from error

Question 20

what is LCNRV

Answer 20

lower of cost and net realizable value

Question 21

what does LCNRV mean

Answer 21

the required method of reporting merchandise inventory in the balance sheet where net realizable value is reported when net realizable value is lower than the cost. This rile ensures inventory is not recorded at a higher value on the balance sheet than what the company cal sell the item for

Question 22

how is LCNRV applied

Answer 22

1. usually item by item, or , when not practicable
2. to groups of similar or related items

Question 23

what is the accounting equation

Answer 23

assets= liabilities + equity

Question 24

what cause an understate ending inventory

Answer 24

understated assets and understated equity

Question 25

what causes overstated ending inventory

Answer 25

overstated assets and overstated equity

Question 26

what is gross profit method

Answer 26

an estimate used for determining ending inventory in the event inventory is destroyed. The companies determining gross profit rate is used to estimate COGS which is them subtracted from the cost of goods available for sale to determine the estimated ending inventory

Question 27

gross profit ratio

Answer 27

measures how much of net sales is gross profit ( net sales minus COGS) calculated as gross profit divided by net sales; also know as the gross margin ratio

Question 28

what is the quick method to estimate ending inventory using the gross profit method

Answer 28

step 1. calculate Cost of goods available for sale = inventory + purchases example: 12,000+20,500=32,500

Step 2. deduct COGS = net sales x COGS% = difference = estimated ending inventory
example: 30,000*(1-0.30)=21,000 - 21,000 = 11,500

Question 29

retail inventory method

Answer 29

a method used by retailers to estimate an ending inventory cost based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at marked selling prices

Question 30

Inventory turnover

Answer 30

a financial statement analysis tool used to determine the number of times a company’s average inventory was sold during an accounting period, calculated by dividing COGS by the average merchandise inventory balance;

Question 31

Day’s sales in inventory

Answer 31

a financial analysis tool used to estimate how many days it will take to convert the inventory on hand into accounts receivable or cash; calculated by dividing the ending inventory by cost of goods sold and multiplying the result by 365