Questions and Answers
When is a physical inventory usually taken?
At the end of the company's fiscal year.
Which of the following is NOT an inventory account?
Ownership passes to the buyer when purchased goods are received from a public carrier if the goods are shipped?
FOB destination
Which of the following is true of the FIFO inventory method?
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What is the cost of the ending inventory under FIFO using a periodic inventory system if 9,000 units are on hand?
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What is the cost of the ending inventory under LIFO using a periodic inventory system if 9,000 units are on hand?
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How much is the cost of ending inventory under the average-cost method if Davidson has 7,000 units on hand?
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What situation requires a departure from the cost basis of accounting to the lower-of-cost-or-market basis in valuing inventory?
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Inventory turnover is calculated by dividing costs of goods sold by?
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How do the results under FIFO in a perpetual system compare to results using a periodic system?
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Which of the following should NOT be included in the physical inventory of a company?
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A manufacturing company will normally have raw materials, work in process, and finished goods as inventory account classifications.
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If costs of goods purchased is $540,000, ending inventory is $20,000 and costs of goods sold is $560,000, how is the beginning inventory calculated?
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Which of the following would most likely employ the specific identification method of inventory costing?
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In periods of rising prices, what will LIFO produce?
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With the assumption of costs and prices generally rising, which of the following is correct?
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If goods in transit are shipped FOB destination?
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Which items should be included in Tidwell's inventory at December 31 considering the goods in transit?
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When a perpetual inventory system is used, what is the purpose of taking a physical inventory?
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The LIFO inventory method assumes that the cost of the latest units purchased are?
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Study Notes
Inventory Basics
- Physical inventory is typically taken at the end of a company's fiscal year.
- Equipment is not classified as an inventory account; inventory accounts include Work in Process, Finished Goods, and Raw Materials.
Ownership and Inventory Methods
- Ownership passes to the buyer when goods are received from a carrier under FOB destination terms.
- FIFO (First In, First Out) method allocates the cost of the earliest purchased units first to cost of goods sold.
Cost Calculations for Inventory
- Under FIFO, Kam Company's ending inventory for 9,000 units at year-end totals $113,000.
- Under LIFO (Last In, First Out), the same company shows an ending inventory of $100,000 for 9,000 units.
- Davidson Electronics reports an ending inventory of $75,250 using the average-cost method, calculated at $10.75 per unit for 7,000 units on hand.
Accounting Principles
- A decline in inventory value prompts a lower-of-cost-or-market basis adjustment instead of adhering strictly to cost basis accounting.
- Inventory turnover ratio is computed by dividing the cost of goods sold by average inventory.
- FIFO results in consistent inventory valuations whether using a perpetual or periodic inventory system.
Physical Inventory Considerations
- Goods on consignment from another company should not be included in the physical inventory.
- A manufacturing company typically holds raw materials, work in process, and finished goods in its inventory accounts.
- Beginning inventory can be derived using the formula: Beginning Inventory = Ending Inventory + Cost of Goods Sold - Costs of Goods Purchased.
Specific Identification and LIFO Effects
- Jewelry stores commonly use the specific identification method for inventory costing.
- In periods of rising prices, LIFO typically results in lower net income compared to FIFO.
- LIFO provides a valuation of the cost of goods sold that is closest to the replacement cost of inventory sold under increasing prices.
Goods in Transit
- For goods in transit, if shipped FOB destination, the seller retains legal title until delivery.
- Tidwell Company's inventory at year-end should include goods held FOB shipping point and not FOB destination.
Purpose of Physical Inventory
- In perpetual inventory systems, physical inventory checks the accuracy of perpetual records.
- LIFO method assumes that the latest purchased units are first allocated to cost of goods sold.
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Description
Test your knowledge on inventory management principles, including different inventory methods like FIFO and LIFO, and understanding ownership transfer under FOB terms. This quiz covers essential calculations and accounting practices related to inventory valuation.
