Questions and Answers
What are the two characteristics that an item must possess to be classified as inventory by a merchandiser?
They are owned by the company and they are in a form ready for sale in the ordinary course of business.
Explain the difference between FOB shipping point and FOB destination.
FOB shipping point means ownership passes to the buyer when the carrier accepts the goods; FOB destination means ownership remains with the seller until the goods reach the buyer.
What is the major advantage and major disadvantage of the specific identification method of inventory costing?
The major advantage is tracking the actual physical flow of goods available for sale; the major disadvantage is potential manipulation of net income.
Which assumed inventory cost flow method matches the following descriptions?
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Study Notes
Inventory Classification
- Inventory items must be owned by the company.
- Items should be in a form ready for sale during normal business operations.
FOB Shipping Terms
- FOB Shipping Point: Ownership transfers to the buyer when the carrier accepts the goods.
- FOB Destination: Ownership remains with the seller until the goods arrive at the buyer's location.
Specific Identification Method
- Advantage: Accurately tracks the physical flow of specific inventory items sold.
- Disadvantage: Potential for management to manipulate reported net income through selection of sold items.
Inventory Cost Flow Methods
- FIFO (First-In, First-Out): Matches actual physical merchandise flow in most cases.
- Average-Cost: Calculates unit cost by dividing total costs of goods available for sale by total units available.
- LIFO (Last-In, First-Out): Assumes that the most recently purchased items are sold first.
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Description
Test your knowledge on key concepts from Chapter 6 of Financial Accounting. This quiz covers essential definitions and principles related to inventory classification and shipping terms. Perfect for revising before your exam or strengthening your understanding of accounting fundamentals.
