Spiceland Intermediate Accounting 6e Ch8
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What items are included in inventory?
- Inventory refers to the assets a company
- (1) intends to sell in the normal course of business, and
- (2) has in production for future sale (work in process), or
- (3) uses currently in the production of goods to be sold (raw materials).
How do the perpetual and periodic inventory systems differ?
The perpetual inventory system continuously tracks and records both changes in inventory quantity and inventory cost. The periodic inventory system adjusts inventory and records cost of goods sold only at the end of each period.
For merchandise shipped f.o.b. destination, when are the goods included in the purchaser's inventory?
Merchandise shipped f.o.b. destination (seller is responsible for the shipping costs) is included in the purchaser's inventory only after it reaches the purchaser's location.
How is the weighted-average unit cost determined in a periodic system?
In a periodic system, the weighted-average unit cost is determined by dividing the cost of goods available for sale by the quantity available for sale.
What cost flow assumption is made when employing the first-in, first-out (FIFO) inventory method?
The first-in, first-out (FIFO) method assumes that items sold are those that were acquired first. Therefore, ending inventory applying FIFO consists of the most recently acquired items.
What cost flow assumption is made when employing the last-in, first-out (LIFO) inventory method?
The last-in, first-out (LIFO) method assumes that items sold are those that were most recently acquired. Therefore, ending inventory applying LIFO consists of the items acquired first.
If inventory quantity is stable and the unit costs paid for inventory are rising, which method, FIFO or LIFO, will result in a lower ending inventory balance?
How is the gross profit ratio computed?
gross profit ratio = (sales - cost of goods sold)/net sales = gross profit/net sales.
How is the inventory turnover ratio computed?
inventory turnover ratio = cost of goods sold/average inventory.
What are the three steps used to determine ending inventory and cost of goods sold using the dollar-value LIFO approach?
- The three-step process used to determine ending inventory and goods of goods sold using the dollar-value LIFO approach are:
- Step 1: Convert ending inventory valued at year-end cost to base year cost. This is accomplished by dividing the ending inventory at year-end cost by the current year's cost index.
- Step 2: Identify the layers of ending inventory and the years they were created.
- Step 3: Convert each layer's base year cost to layer year cost using the cost index for the year it was acquired.
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