Intermediate Accounting Chapter 8
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Questions and Answers

What is the main assumption of the First-In, First-Out (FIFO) method?

  • Goods are used based on their cost
  • Goods are used in the reverse order in which they are purchased
  • Goods are used randomly regardless of purchase order
  • Goods are used in the order in which they are purchased (correct)

    • What is the advantage of using the Average-Cost method?

  • It is easy to implement
  • It is not subject to income manipulation (correct)
  • It is more accurate than FIFO
  • It is only used for periodic inventory

    • What is the main characteristic of the Moving-Average method?

  • It computes a new average unit cost each time a purchase is made (correct)
  • It uses the weighted average cost of all purchases
  • It computes a new average unit cost at the end of the period
  • It only uses the cost of the most recent purchase

    • What is the purpose of calculating Goods Available for Sale?

    <p>To determine the cost of goods sold</p> Signup and view all the answers

    What is the main difference between the Weighted-Average method and the Moving-Average method?

    <p>The Weighted-Average method computes a new average unit cost at the end of the period, while the Moving-Average method computes a new average unit cost each time a purchase is made</p> Signup and view all the answers

    What is the main advantage of using the FIFO method?

    <p>It approximates the physical flow of goods</p> Signup and view all the answers

    What is the main limitation of measuring a specific physical flow of inventory?

    <p>It is often impossible to measure the physical flow of goods</p> Signup and view all the answers

    What is the main characteristic of the Cost Flow Methods?

    <p>They are used to price items in the inventory on the basis of the average cost of all similar goods available during the period</p> Signup and view all the answers

    What is the relationship between the ending inventory and the current cost when using the FIFO method?

    <p>The ending inventory is close to the current cost</p> Signup and view all the answers

    What is the main purpose of using a Cost Flow Method?

    <p>To price items in the inventory on the basis of the average cost of all similar goods available during the period</p> Signup and view all the answers

    Study Notes

    Inventory Classifications and Systems

    • Inventories are assets held for sale in the ordinary course of business or goods to be used in the production of goods to be sold.
    • Merchandising companies have one inventory account, while manufacturing companies have three inventory accounts: Raw Materials, Work in Process, and Finished Goods.
    • There are two types of systems for maintaining inventory records: perpetual system and periodic system.

    Perpetual and Periodic Systems

    • Perpetual system: purchases are debited to Inventory, and Cost of Goods Sold is debited and Inventory is credited for each sale.
    • Periodic system: purchases are debited to Purchases, and Ending Inventory is determined by physical count.
    • Perpetual system provides a continuous record of the balance in both the Inventory and Cost of Goods Sold accounts.

    Inventory Cost Flow Methods

    • Specific Identification Method: identifies specific costs with specific inventory items.
    • Average-Cost Method: prices items in the inventory on the basis of the average cost of all similar goods available during the period.
    • Weighted-Average Method: calculates a weighted-average cost of goods available for sale.
    • Moving-Average Method: computes a new average unit cost each time a purchase is made.
    • First-In, First-Out (FIFO) Method: assumes goods are used in the order in which they are purchased, approximating the physical flow of goods, and ending inventory is close to current cost.

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    Description

    This chapter covers the valuation of inventories using a cost-basis approach, including inventory classifications and different inventory systems. Learn about the principles and methods of inventory valuation.

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