Chapter 7

Question 1

When does a company recognize inventory and A/P

Answer 1

at the time it controls the asset

Question 2

What is FOB shipping point

Answer 2

control changes when product is shipped

Question 3

What is FOB destination

Answer 3

Control changes when the delivery is received

Question 4

What are consigned goods

Answer 4

• Goods out on consignment remain the property of the consignor

-consignee makes no entry to inventory accounts

Question 5

What are the two costs included with inventory

Answer 5

Period and Product Costs

Question 6

What are product costs

Answer 6

Costs directly related to the product, go into inventory account

Question 7

What are period Costs

Answer 7

Costs that don’t go into the product but still related to inventory, go into the expenses account

Question 8

What is freigh out recorded as

Answer 8

Selling expense (period cost)

Question 9

What companies use specific identification for inventory cost

Answer 9

• Small number of relatively costly easy to distinguish items

Question 10

What is specific identification

Answer 10

When you match actual cost with physical flow of goods

Question 11

Why do companies use cost assumptions

Answer 11

because it is too difficult to rack the physical movement of goods

Question 12

What is a disadvantage of specific identification

Answer 12

May allow a company to manipulate net income

Question 13

Why would a company use FIFO

Answer 13

-assumes COGS are sold in order purchased
-Approximates physical flow of goods
-Ending inventory is close to current cost

Question 14

What are downsides of FIFO

Answer 14

-Fails to match current costs against current revenues
-Higher-income so higher taxes

Question 15

Why would a company use LIFO

Answer 15

-allows companies to have lower taxes because COGS is higher

Question 16

What are disadvantages of LIFO

Answer 16

• no tie to physical flow, lower income, lower current assets,

Question 17

What is the LIFO conformity rule

Answer 17

if you use LIFO for tax, you must use it for financial purposes

Question 18

Why do companies use LIFO for tax and external financial reporting and FIFO for internal purposes

Answer 18

1.) Pricing decisions
2.) Record keeping is easier
3.) Profit sharing or bonus arrangements
4.) LIFO is troublesome for interim periods

Question 19

What is the LIFO reserve

Answer 19

Allowance account that reduces inventory to LIFO Account

Question 20

What is the journal entry for LIFO reserve

Answer 20

COGS
Allowance to Reduce
Inventory to LIFO

Question 21

Why is the specific goods approach to costing LIFO inventories unrealistic

Answer 21

• Cost and tracking each inventory is expensive
  -Erosion of the LIFO inventory can easily occur which can distort net income

Question 22

What is LIFO liquidation

Answer 22

older and lower-cost inventory is liquidated (sold) resulting in high net income and high taxes

Question 23

What is $ Value LIFO

Answer 23

Helps protect companies from LIFO liquidation

-increases and decreases in a pool are measured in terms of total dollar value, not physical quantity of goods

Question 24

What are the advantages of $ Value LIFO

Answer 24

1.) Broader range of goods in the pool
2.) Permits replacement of similar goods
3.)Helps protect from LIFO liquidation

Question 25

what is the rule for layers in $ Value LIFO

Answer 25

Layers form only when ending inventory @ base year exceeds the beginning inventory at base year