Accounting Iich. 6 Reading Guide

Accounting IICh. 6 Reading Guide

ACCOUNTING II

Chapter 6Reading Guide

Answer the following questions as you read Chapter 6, pages 168-187.

/ What is the largest asset for most merchandising businesses?

6-1 THE NATURE OF MERCHANDISE INVENTORY

/ The cost of inventory effects which financial statements?
/ If ending inventory is understated, what effect will it have on reported Net Income?
/ What is included in the cost of goods?
/ What are the two methods used to determine the cost of goods and number of goods in inventory?
/ What does FOB stand for?
/ Who pays for freight with FOB shipping point?
/ When does the buyer actually own the goods with FOB shipping point?
/ Under FOB destination, who pays for transportation? When does the ownership of the goods transfer?
/ What are goods on consignment? Give an example of a business in our community that sells items on consignment?
/ How does the consignee make a profit from the consignment?
/ Who must include the cost of the consigned goods in their inventory, the consignee or the consignor?
/ What is a continuous record of merchandise inventory increases, decreases, and balance on hand called?
/ What is a stock record?
/ What is a purchase order?
/ What is an inventory that is determined by counting, weighing, or measuring items called?
/ On average, how often do businesses take an inventory by counting items? Why that many times?
/ What is a problem with only using a periodic inventory?
/ Which form is used when counting, weighing, or measuring items in inventory?
/ If there are differences between the periodic inventory and the perpetual inventory, where are differences recorded?

6-2 FIRST-IN, FIRST-OUT INVENTORY COSTING METHOD

/ Which accounting concept is being applied when a dollar cost amount is determined for each item in inventory?
/ What is the assumption of the FIFO (First-in, First-out) inventory method?
/ Which purchase prices are used in the FIFO method?
/ What is the assumption of the LIFO (Last-in, Last-out) inventory method?
/ Which purchase prices are used in the LIFO method?
/ What is the assumption of the Weighted-Average Inventory Costing Method?
/ Which method provides a more consistent method of reporting inventory if the business experiences frequent fluctuations in prices?
/ Why is it important for a business to pick an inventory method and stick with it?
/ Explain the Japanese concept just-in-time inventory system? See FYI
/ What does market value refer to?
/ What two amounts are needed to apply a lower of cost or market evaluation?

6-3 ESTIMATING THE INVENTORY

/ Under which inventory method may it be necessary to estimate inventory for interim statements?
/ Why may a business choose to use the Gross Profit of Estimating Inventory versus the Retail Method of Estimating Inventory (i.e. why is the Retail Method a more challenging method)?
/ What two calculations help a business determine how fast their inventory is selling?
/ Is a low merchandise inventory turnover ratio a good thing? Why or why not?
/ Is a low number in Average of Number of Days’ Sales in Merchandise Inventory a good thing? Why or why not?

1