Principles of Financial Accounting: Chapter 5

Questions and Answers

What is the exception to the use of different costing methods for financial reporting and tax reporting?

LIFO conformity rule

What are consignment goods?

Goods shipped by the owner to the consignee who sells the goods for the owner

Which inventory valuation method yields the highest reported net income during a period of steadily rising costs?

FIFO method

How are damaged and obsolete goods accounted for in inventory?

Included in inventory at their net realizable value Signup and view all the answers

What costs are included in the Merchandise Inventory account?

Storage, transportation-in, invoice price minus any discount, insurance Signup and view all the answers

Which inventory costing methods result in the same values for ending inventory and cost of goods sold regardless of the system used?

Specific Identification Signup and view all the answers

What acceptable methods are used for assigning specific costs to inventory?

LIFO, FIFO, Weighted Average, and Specific Identification Signup and view all the answers

Why are physical counts of inventory necessary?

To adjust the inventory account to the actual inventory available Signup and view all the answers

When are goods in transit included in a purchaser's inventory?

When the goods are shipped FOB shipping point Signup and view all the answers

Which inventory valuation method approximates current cost and mimics actual flow of goods for most businesses?

FIFO Signup and view all the answers

How does the selected inventory costing method impact a business?

Gross profit and ending inventory Signup and view all the answers

What does the inventory turnover ratio reveal?

How many times a company sells its merchandise inventory during a period Signup and view all the answers

What internal controls should be applied when taking a physical count of inventory?

Ticketing only once, validity checks, second counts, prenumbered inventory tickets Signup and view all the answers

How must the cost of goods sold available for sale be allocated at the end of the period?

Between ending inventory and cost of goods sold Signup and view all the answers

Which inventory valuation method tends to smooth out erratic changes in costs?

Weighted average Signup and view all the answers

Study Notes

Key Concepts in Financial Accounting

Companies often utilize different costing methods for financial and tax reporting, with the LIFO conformity rule as an exception.
Consignment goods refer to items shipped by the owner to a consignee, who sells them on the owner's behalf.
During periods of rising costs, FIFO (First-In, First-Out) method results in the highest reported net income.

Inventory Valuation and Reporting

Damaged or obsolete goods can be included in inventory but must be reported at their net realizable value.
Merchandise Inventory costs may encompass storage, transportation-in, invoice price (after discounts), and insurance costs.

Inventory Costing Methods

The Specific Identification method maintains consistent values for ending inventory and cost of goods sold, regardless of inventory system used.
Acceptable inventory costing methods include LIFO (Last-In, First-Out), FIFO, Weighted Average, and Specific Identification.

Physical Inventory Counts

Physical inventory counts are essential for adjusting inventory accounts to reflect actual goods available.
Goods in transit are counted in a purchaser's inventory when shipped FOB (Free On Board) shipping point.

Financial Impact of Costing Methods

FIFO method yields balance sheet inventory valuations that closely match current costs and typically aligns with actual goods flow for most businesses.
The chosen inventory costing method affects gross profit and the values of ending inventory.

Inventory Management Ratios

The inventory turnover ratio indicates how frequently a company sells its merchandise inventory during a specific period.

Internal Controls in Inventory

Effective internal controls during physical inventory counts should include measures such as unique ticketing, validity checks by counters, second counts by alternative counters, and prenumbered tickets to enhance accuracy.

Cost of Goods Sold Allocation

Regardless of the costing method, the total cost of goods available for sale must be split between ending inventory and cost of goods sold at the end of the accounting period.

Smoothing Cost Variability

The Weighted Average method is beneficial for smoothing out significant fluctuations in inventory costs.

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Test your knowledge on key concepts from Chapter 5 of Principles of Financial Accounting. This chapter covers important topics such as costing methods, consignment goods, and inventory valuation methods. Use these flashcards to reinforce your understanding and prepare for assessments.