Chapter 6 – Merchandise Inventory Name ______
College Accounting Reading on Pages 312-329
Chapter Intro
In Exhibit 6-1, the account Inventories are a part of what classification?
The Cost of Goods Sold and Gross profit are found on which financial statement?
INVENTORY COSTING METHODS
Ending Inventory = Number of units x Unit ______
______
Cost of goods sold = Number of units x Unit ______
______
If a company uses a perpetual inventory record, records are backed up by a .
The cost of each unit of inventory is:
UNIT COST = ______-
The four costing methods GAAP allows are:
4.
A company can use any of these 4 methods to
The specific unit-cost method is also called the
This method uses the specific cost of each
Few companies use this method; a popular .com business does, however:
Under FIFO, is the cost of goods sold is based on the ______purchases.
Under LIFO, the cost of goods sold is based on the most ______purchases.
Under the average-cost method, the cost of goods sold is based on an ______cost for the period.
INVENTORY COSTING IN A PERPETUAL SYSTEM
The different inventory costing methods produce different amounts for:
· ______
· ______
OBJECTIVE #1: Account for Inventory by the FIFO, LIFO, and Average-Cost methods.
FIFO (First In ______) costing is consistent with the physical movement of inventory for most companies. They sell their ______inventory ______. Under FIFO, the first costs incurred are the first costs assigned to ______.
FIFO leaves in ending inventory the last-- ______costs.
LIFO (Last In ______) is the opposite of ______.
Under LIFO, cost of goods sold comes from the ______--the most recent—purchases.
Ending inventory comes from the ______costs of the period.
Average-cost method: With this method, the business computes a new ______
after each purchase. Ending inventory and cost of goods sold are then based on the same ______cost per unit.
OBJECTIVE #2: Compare the effects of FIFO, LIFO, AND average cost
According to Exhibit 6-7 ______is the most popular inventory costing method; ______is the next most popular and ______ranks third.
Exhibit 6-8 shows that ______produces the lowest cost of goods sold and the highest ______
______. Net income is also the ______under FIFO when inventory costs are
______. Many companies prefer high income in order to attract ______and
______on good terms. FIFO offers this benefit.
LIFO results in the ______cost of goods sold and the ______gross profit. That lets companies pay the ______when inventory costs are risking. Low tax payments conserve ______and that’s the main benefit of LIFO. The downside of LIFO is that the company reports ______.
The average cost method generates amounts that fall between the extremes of ______and ______.
ACCOUNTING PRINCIPLES AND INVENTORIES
Several accounting principles affect inventories. Among these are: ______, ______, ______, and ______
______.
The consistency principle states that businesses should ______
______.
Consistency helps investors compare a company’s financial ______from one period to the next.
Companies must report ______.
The disclosure principle holds that a company should report ______
______.
The company should report ______, ______, and ______information about itself.
The materiality concept states that a company must perform ______
______.
Conservatism in accounting means exercising ______
______.
Three quotes from Conservatism:
“
.”
“
.”
“
.”
The goal of conservatism is to .
OTHER INVENTORY ISSUES
OBJECTIVE #3: Apply the lower-of-cost-or-market rule to inventory.
The lower of cost or market rule (abbreviated as ______) shows accounting conservatism in action.
LCM requires that inventory be reported in the financial statements at whichever is lower—
--the ______or
--the ______
For inventories, market value generally means ______(that is, the cost to replace the inventory on hand). If the replacement cost of inventory falls below its historical cost, the business ______.
On the balance sheet the business reports ending inventory at its ______value.
An example of a disclosure statement: (for Rocky Mountain Sportswear):
NOTE 2: STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
OBJECTIVE #4: Measure the effects of inventory errors.
Businesses count their inventory at .
An error in ending inventory creates a .
An overstatement of ending inventory affects ______, ______, and ______
If Ending Inventory is overstated,
Cost of goods sold is ______
Gross profit is ______
Net income is ______
An understatement of ending inventory has the opposite effect:
Cost of goods sold is ______
Gross profit is ______
Net income is ______
Recall that one period’s ending inventory becomes the next period’s ______.
An inventory error cancels out after two periods because:
Ending inventory is
and the same amount is
ETHICAL ISSUES:
No area of accounting has a deeper ethical dimension than .
There are two main schemes for cooking the books. The easiest way is to
.
The second way to “cook the books” involves .
Describe Datapoint’s scheme:
Describe MinScribe’s scheme:
OBJECTIVE #5: Estimate ending inventory by the gross profit method.
The gross profit method provides a way to estimate inventory:
+
=
-
=
Or:
+
=
-
=
FYI: The gross profit method can also be used with a periodic inventory system to estimate the amount of inventory shrinkage. Comparing the estimated ending inventory using this method to the physical inventory count provides an approximation of the inventory shortage.