30 Questions
When should a company record purchases of inventory in the Inventory account?
When it receives the goods.
What is the primary consideration for a company to record inventory?
Having control of the asset.
Why does a company generally record acquisitions when it receives the goods?
Because it is difficult to determine the exact time of legal passage of title for every purchase.
What accounts for a company's ability to record inventory?
Directing the use of and obtaining benefits from the inventory purchased.
Why is it acceptable for a company to record acquisitions when it receives goods?
To prevent material errors in accounting.
What factor makes determining legal passage of title challenging for companies?
Time at which substantial benefits are obtained.
What is one of the reasons companies use the retail inventory method?
To calculate net income without a physical count of inventory
Which of the following is NOT required by accounting standards for inventory-related financial statement disclosure?
The quantity of merchandise sold in the period
What is one purpose of disclosing the amount of any write-down of inventories recognized as an expense?
To indicate the impact of inventory losses on net income
In the retail inventory method, what is a control measure achieved by companies?
Regulating quantities of merchandise on hand
What is the purpose of disclosing the circumstances or events that led to the reversal of a write-down of inventories?
To show the factors that influenced the decision to reverse a write-down
What does the carrying amount of inventories pledged as security for liabilities indicate?
The amount at which inventories are recorded on financial statements
What method does the IASB require in cases where inventories are not ordinarily interchangeable?
Specific identification
Under what circumstances are the specific identification criteria met for inventory costing?
All of the above
Why do companies often use average-cost methods for inventory costing?
For practical reasons
What is the basis for pricing items in the inventory under the average-cost method?
Average costs of all similar goods available during the period
In computing the average cost per unit, what must companies include?
Beginning inventory and total units available costs
Why do proponents of average-cost methods argue against measuring a specific physical flow of inventory?
It is often impossible to measure accurately
What is the purpose of the retail inventory method?
To convert retail prices to cost
In the retail inventory method, what does the retailer need to keep a record of?
Total cost and retail value of goods purchased
What is the first step in determining the estimated inventory at retail using the retail inventory method?
Deducting sales for the period from goods available for sale
Why is it necessary to compute the cost-to-retail ratio for all goods in the retail inventory method?
To divide total goods available at cost by total goods available at retail price
Based on the hypothetical data provided, what is the ending inventory at retail (in birr)?
Birr 24,000
What is the final step in obtaining ending inventory at cost in the retail inventory method?
Multiplying the cost-to-retail ratio by ending inventory valued at retail
What is the inventory amount at LCNRV when applying it to individual items?
Birr 384,000
Why does the total inventory amount at LCNRV increase when using major groups instead of individual items?
Due to an increase in net realizable values
Which method records the income effect of valuing inventory at net realizable value by debiting cost of goods sold?
Cost-of-goods-sold method
In ABC Foods' case, why does using the total-inventory approach offset the high net realizable value for spinach?
Because net realizable values higher than cost offset lower values
What happens to the income statement when the cost-of-goods-sold method is used for inventory valuation?
It reports a loss
How does ABC Foods prevent reporting a loss in their income statement when valuing inventory at net realizable value using the Cost-of-goods-sold method?
By debiting cost of goods sold for the write-down
Test your knowledge on the specific identification method and cost flow assumptions for inventory valuation as required by the IASB. Learn about when to apply specific identification criteria and the use of FIFO and average-cost methods.
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