Financial Accounting Overview: Inventory Management
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Questions and Answers

What is the correct market value for the portables in the inventory valuation?

  • $55,000
  • $45,000 (correct)
  • $60,000
  • $52,000

    • How does an inventory error affect net income according to the provided formula?

  • It only affects the ending inventory.
  • It impacts both COGS and net income. (correct)
  • It has no effect on net income.
  • It only impacts COGS.

    • What is included in the formula for Cost of Goods Sold?

  • Ending inventory only
  • Ending inventory and replacement costs
  • Beginning inventory only
  • Beginning inventory and goods purchased (correct)

    • What does the total inventory amount to in the provided illustration?

    <p>$159,000</p> Signup and view all the answers

    Which of the following steps is NOT part of finding the effect of an inventory error?

    <p>Document customer feedback</p> Signup and view all the answers

    What is the average days to sell calculated from the inventory turnover ratio?

    <p>47 days</p> Signup and view all the answers

    Which costing method charges the cost of the earliest goods on hand to cost of goods sold?

    <p>FIFO</p> Signup and view all the answers

    What is the total cost of inventory after all purchases for Bow Valley Electronics?

    <p>$12,000</p> Signup and view all the answers

    How many units were bought on April 15 for Bow Valley Electronics?

    <p>200 units</p> Signup and view all the answers

    If the cost of goods sold on September 10 includes January 1 inventory and purchases from April 15 and August 24, what cost flow method is used?

    <p>FIFO</p> Signup and view all the answers

    What is the total balance after all transactions listed?

    <p>$5,767</p> Signup and view all the answers

    What is the gross profit method primarily used for?

    <p>To prepare monthly financial statements</p> Signup and view all the answers

    Which date shows a purchase of 300 units at $12?

    <p>August 24</p> Signup and view all the answers

    When should the gross profit method not be used?

    <p>To prepare the company’s financial statements at year-end</p> Signup and view all the answers

    Which transaction corresponds to a sale of 550 units for $11.333 each?

    <p>September 10</p> Signup and view all the answers

    What is the average cost per unit after the purchase made on April 15?

    <p>$10.67</p> Signup and view all the answers

    What would be the Cost of Goods Sold (COGS) if 150 units are sold at the average cost calculated on April 15?

    <p>$1,600.00</p> Signup and view all the answers

    Total units on hand after the sales made on September 10 are:

    <p>250 units</p> Signup and view all the answers

    Which of the following statements accurately describes the average cost method in a perpetual inventory system?

    <p>It computes a new average cost each time a purchase is made.</p> Signup and view all the answers

    What is the resulting balance in inventory after all recorded purchases and sales?

    <p>$5,700</p> Signup and view all the answers

    What is the weighted average unit cost calculated for the given inventory values?

    <p>$12.00</p> Signup and view all the answers

    What amount is allocated to the cost of goods sold in this scenario?

    <p>$6,600</p> Signup and view all the answers

    Which statement correctly describes the role of consistent application of cost flow methods?

    <p>It ensures comparable financial statements across periods.</p> Signup and view all the answers

    If the market value of inventory falls below its cost, what must occur?

    <p>The inventory is written down to its market value.</p> Signup and view all the answers

    What is the total cost of the beginning inventory listed in the data?

    <p>$1,000</p> Signup and view all the answers

    How many units of inventory were purchased on 08/24?

    <p>300</p> Signup and view all the answers

    What is the total number of units available for sale?

    <p>1,000</p> Signup and view all the answers

    What must be included in financial statements if a change in the cost flow method occurs?

    <p>A note of explanation regarding the change.</p> Signup and view all the answers

    What are the three distinct categories of inventory for manufacturers?

    <p>Raw materials, Finished goods, Work in process</p> Signup and view all the answers

    What is the first step in determining inventory quantities at the balance sheet date?

    <p>Take a physical inventory count</p> Signup and view all the answers

    Under FOB shipping point, ownership of goods passes to the buyer at which point?

    <p>When the goods are loaded on the seller's delivery vehicle</p> Signup and view all the answers

    In the case of consigned goods, who retains ownership until the goods are sold?

    <p>The consignor</p> Signup and view all the answers

    What is not required when determining ownership of goods in transit?

    <p>Taking a physical inventory count</p> Signup and view all the answers

    Which method tracks actual flow of goods with each item marked with its unit cost?

    <p>Specific identification method</p> Signup and view all the answers

    When determining inventory, what should companies do regarding ownership of goods?

    <p>Determine ownership of all goods in transit</p> Signup and view all the answers

    Which of these options correctly describes a consignee's role in a consignment agreement?

    <p>Agrees to sell the goods and remit proceeds to the consignor</p> Signup and view all the answers

    Study Notes

    Financial Accounting Overview

    • This material covers financial accounting, specifically inventory management.
    • The text references Weygandt, Kieso, and Kimmel's Financial Accounting book.
    • It was prepared by Kurt M. Hull, MBA, CPA, from California State University, Los Angeles.
    • Published by John Wiley & Sons, Inc.

    Classifying Inventory

    • Manufacturers categorize inventory into three types:
      • Raw Materials
      • Work in Process
      • Finished Goods

    Determining Inventory Quantities

    • Companies need to determine the quantity and value of inventory at the balance sheet date.
    • This involves two steps:
      • Taking a physical inventory count.
      • Determining ownership of goods.

    Determining Ownership of Goods in Transit

    • FOB Shipping Point: Ownership transfers when the goods leave the seller's possession.
    • FOB Destination Point: Ownership transfers when the goods reach the buyer.

    Determining Ownership of Consigned Goods

    • A consignment agreement transfers goods from a consignor to a consignee.
    • The consignee sells the goods and remits the proceeds to the consignor, less any fees.
    • Consigned goods remain part of the consignor's inventory until sold.

    Specific Identification

    • This method tracks the actual flow of goods and assigns a unit cost to each individual item.
    • The cost of goods sold is determined by the actual cost of the items sold.

    Assumed Cost Flow Methods

    • These methods assume cost flow without directly reflecting physical flow.
      • FIFO (First-In, First-Out)
      • LIFO (Last-In, First-Out)
      • Average Cost

    FIFO (First-In, First-Out) Assumptions

    • Earliest purchased goods are sold first.
    • The cost of the earliest goods is recognized as cost of goods sold.
    • Ending inventory consists of the most recently purchased items.

    LIFO (Last-In, First-Out) Assumptions

    • Most recently purchased goods are sold first.
    • The cost of the most recent acquisitions is recognized as cost of goods sold.
    • Ending inventory consists of the earliest purchased items.

    Average Cost Method Assumptions

    • Inventory items are homogeneous (identical).
    • The weighted average unit cost is calculated and applied to units on hand to determine the cost of ending inventory and cost of goods sold.

    Use Cost Flow Methods Consistently

    • Companies must consistently use the chosen cost flow method from one period to another.
    • Consistent application ensures comparability in financial statements.
    • Changes in the cost flow method should be disclosed.

    Lower of Cost or Market (LCM)

    • Inventory is written down to its market value if market value is lower than its cost.
    • Market value is equivalent to replacement cost.

    Inventory Errors

    • Errors in inventory affect both the cost of goods sold (COGS) and net income.

      • Understated Beginning Inventory: COGS understated, Net Income overstated.
      • Understated Ending Inventory: COGS overstated, Net Income understated.
      • Overstated Beginning Inventory: COGS overstated, Net Income understated.
      • Overstated Ending Inventory: COGS understated, Net Income overstated.

    • Errors in the current period reverse in the next.

    • Errors in ending inventory affect the balance sheet.

      • Overstated Ending Inventory: Overstated Assets, Overstated Stockholders' Equity.
      • Understated Ending Inventory: Understated Assets, Understated Stockholders' Equity.

    Inventory Turnover

    • Inventory turnover measures the number of times average inventory is sold within a period.
    • Formula: COGS / Average Inventory

    Perpetual Inventory Systems

    • Three cost flow methods used for perpetual inventory: FIFO, LIFO, Weighted-Average

    Gross Profit Method

    • Estimates ending inventory by calculating the gross profit rate based on net sales.
    • This method is used for monthly financial statements under a periodic inventory system.
    • It's not suitable for year-end financial statements.

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    Description

    This quiz provides an overview of financial accounting with a focus on inventory management concepts. It covers the categorization of inventory, methods for determining inventory quantities, and the nuances of ownership transfer for goods. Utilize this quiz to enhance your understanding of key inventory accounting principles as referenced in Weygandt, Kieso, and Kimmel's Financial Accounting.

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