Podcast
Questions and Answers
What does the lower-of-cost-or-market rule require for inventory reporting?
What does the lower-of-cost-or-market rule require for inventory reporting?
When costs are rising, which inventory method results in the lowest cost of goods sold?
When costs are rising, which inventory method results in the lowest cost of goods sold?
In a declining cost scenario, which inventory method generally results in the highest ending merchandise inventory?
In a declining cost scenario, which inventory method generally results in the highest ending merchandise inventory?
How should Smart Touch Learning report an inventory initially purchased for $3,000 but with a current replacement cost of $2,200?
How should Smart Touch Learning report an inventory initially purchased for $3,000 but with a current replacement cost of $2,200?
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What is the effect on net income when using LIFO during a period of rising inventory costs?
What is the effect on net income when using LIFO during a period of rising inventory costs?
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Which method would typically result in the most reliable current representation of inventory value?
Which method would typically result in the most reliable current representation of inventory value?
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What is one limitation of the lower-of-cost-or-market rule?
What is one limitation of the lower-of-cost-or-market rule?
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How is Ending Merchandise Inventory calculated under a perpetual inventory system?
How is Ending Merchandise Inventory calculated under a perpetual inventory system?
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What is the Cost of Goods Sold if 14 units are sold at a unit cost of $350?
What is the Cost of Goods Sold if 14 units are sold at a unit cost of $350?
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Which inventory valuation method may result in fluctuating profit margins due to changing costs?
Which inventory valuation method may result in fluctuating profit margins due to changing costs?
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Which of the following methods is NOT an allowable inventory costing method by GAAP?
Which of the following methods is NOT an allowable inventory costing method by GAAP?
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What challenge arises when there are different costs for different groups of inventory?
What challenge arises when there are different costs for different groups of inventory?
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In which scenario would the specific identification method be most appropriately applied?
In which scenario would the specific identification method be most appropriately applied?
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Which inventory costing method assumes that the oldest inventory costs are used first when calculating Cost of Goods Sold?
Which inventory costing method assumes that the oldest inventory costs are used first when calculating Cost of Goods Sold?
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What is a critical factor in determining the cost of goods sold under a perpetual inventory system?
What is a critical factor in determining the cost of goods sold under a perpetual inventory system?
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Under the lower-of-cost-or-market rule, what happens if the market value of inventory falls below its cost?
Under the lower-of-cost-or-market rule, what happens if the market value of inventory falls below its cost?
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What is a key requirement of good inventory controls?
What is a key requirement of good inventory controls?
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How does the materiality concept affect financial reporting for varying company sizes?
How does the materiality concept affect financial reporting for varying company sizes?
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Which of the following best describes the conservatism principle in accounting?
Which of the following best describes the conservatism principle in accounting?
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What is the significance of the lower-of-cost-or-market rule?
What is the significance of the lower-of-cost-or-market rule?
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What advantage does data analytics offer to businesses regarding inventory management?
What advantage does data analytics offer to businesses regarding inventory management?
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Under a perpetual inventory system, how are inventory costs primarily tracked?
Under a perpetual inventory system, how are inventory costs primarily tracked?
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What must a company do when it performs a physical count of inventory?
What must a company do when it performs a physical count of inventory?
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Why is understanding inventory costing methods essential for a business?
Why is understanding inventory costing methods essential for a business?
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Study Notes
Merchandise Inventory
- Merchandise inventory includes goods held for sale in a business.
- Accounting principles related to merchandise inventory include:
- Consistency: Businesses should use the same accounting methods consistently throughout periods.
- Disclosure: Financial statements must contain enough information for knowledgeable decisions about the company.
- Materiality: Accounting only needs to be precise for items that significantly affect the business's financial status.
- Conservatism: A business should report the least favorable figures in financial statements when multiple options are available.
Control Over Merchandise Inventory
- Proper inventory controls ensure that inventory purchases and sales are authorized and correctly accounted for within the accounting system.
- Inventory is purchased with proper authorization.
- Receipt of inventory is tracked and documented.
- Damaged inventory is recorded appropriately.
- Annual physical counts of inventory are performed.
- Inventory is recorded and removed from Merchandise Inventory when sold.
Data Analytics in Accounting
- Inventory is a crucial asset for merchandising and manufacturing businesses.
- Businesses use data analytics tools to evaluate their inventory.
- Examples include:
- Airbnb using data on customer vacation habits to identify areas in cities with a need for more accommodation.
- Dickey's Barbecue Pit uses 20-minute real-time data analysis of meat and side inventory at various locations to prevent spoiled food and sell excess inventory.
Learning Objective 6.2: Perpetual Inventory System
- Ending Merchandise Inventory = Number of units on hand × Unit cost.
- Cost of Goods Sold = Number of units sold × Unit cost.
- At the end of each period, ending inventory is counted, and dollar amounts assigned.
- The units sold and their dollar amounts are determined and assigned to Cost of Goods Sold
- In a perpetual inventory system, the inventory and its cost are continuously updated in the accounting system
Inventory Costing Methods
- Four basic inventory costing methods allowed under GAAP:
- Specific Identification: Costing method based on the specific cost of particular inventory units (e.g., automobiles, jewels, real estate)
- First-In, First-Out (FIFO): Assumes the earliest purchased items are sold first.
- Last-In, First-Out (LIFO): Assumes the latest purchased items are sold first.
- Weighted-Average: Computes a new weighted-average cost per unit after each purchase, where the weighted-average cost per unit is the total cost of goods available for sale divided by the number of units available.
Learning Objective 6.3: Comparing Inventory Costing Methods
- When costs are rising, FIFO results in the highest gross profit.
- When costs are rising; LIFO results in the lowest gross profit.
- Impact of inventory costing methods on income statement and balance sheet.
Learning Objective 6.4: Lower-of-Cost-or-Market (LCM) Rule
- Inventory is reported at the lower of its historical cost or its market value (replacement cost), in financial statements.
Learning Objective 6.5: Merchandise Inventory Errors
- Errors in inventory impact related accounts.
- Incorrect ending inventory calculations can lead to incorrect Cost of Goods Sold, gross profit, and net income.
- Overstating ending inventory results in understated cost of goods sold, overstated gross profit, and overstated net income.
- Understating ending inventory results in overstated cost of goods sold, understated gross profit, and understated net income.
- Inventory errors often cancel out after two accounting periods.
Learning Objective 6.6: Inventory Turnover and Days' Sales in Inventory
- Inventory turnover = Cost of goods sold / Average merchandise inventory
- Inventory Turnover Ratio: Evaluates how rapidly inventory is sold compared to industry averages, A high turnover indicates easy selling, while a low turnover indicates difficulty.
- Days' sales in inventory = 365 days / Inventory turnover
- Days' sales in inventory measures the average number of days that inventory is held by the company.
Learning Objective 6.7: Periodic Inventory System
- Inventory is not tracked continuously in the accounting system.
- The beginning inventory balance is carried until the end of the period.
- Purchases are accumulated during the period.
- The ending inventory balance replaces the beginning inventory balance.
- Cost of Goods Sold and Ending inventory are calculated at the end of the accounting period.
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Description
This quiz covers essential accounting principles related to merchandise inventory, including consistency, disclosure, materiality, and conservatism. It also emphasizes the importance of inventory control measures for accurate financial reporting. Test your understanding of these concepts as they apply to inventory management.
