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Questions and Answers
What must be determined when taking physical inventory?
What must be determined when taking physical inventory?
- Market value of the inventory.
- Number of units on hand and their cost. (correct)
- Net income.
- Cost of goods sold.
What is the main purpose of taking a physical inventory?
What is the main purpose of taking a physical inventory?
- To prepare accurate financial statements. (correct)
- To identify outdated inventory.
- To determine if inventory is stored properly.
- To ensure the inventory is insured.
Which of the following is NOT a method of inventory valuation?
Which of the following is NOT a method of inventory valuation?
- Average cost.
- Last-in, First-out. (correct)
- Specific identification.
- First-in, First-out.
Which of the following is a key step in determining inventory quantities?
Which of the following is a key step in determining inventory quantities?
Why is determining ownership of goods important when taking inventory?
Why is determining ownership of goods important when taking inventory?
What is a key factor in determining the ownership of goods in inventory?
What is a key factor in determining the ownership of goods in inventory?
Which of the following methods of inventory valuation is NOT used to allocate costs to inventory?
Which of the following methods of inventory valuation is NOT used to allocate costs to inventory?
Which of the following methods would be best for a company that sells high-priced, unique items?
Which of the following methods would be best for a company that sells high-priced, unique items?
Which inventory costing method results in the highest profit when prices are rising?
Which inventory costing method results in the highest profit when prices are rising?
Which inventory costing method provides the most current valuation of inventory?
Which inventory costing method provides the most current valuation of inventory?
Which of the following is a benefit of using a consistent cost formula for inventory?
Which of the following is a benefit of using a consistent cost formula for inventory?
What is the primary reason for using the weighted-average inventory costing method?
What is the primary reason for using the weighted-average inventory costing method?
Which inventory costing method is most likely to be used by a company that sells a large number of identical items?
Which inventory costing method is most likely to be used by a company that sells a large number of identical items?
What is the primary difference between the FIFO and LIFO inventory costing methods?
What is the primary difference between the FIFO and LIFO inventory costing methods?
How does using the wrong inventory costing method affect a company's financial statements?
How does using the wrong inventory costing method affect a company's financial statements?
Which inventory costing method is most likely to be used by a company that sells perishable goods?
Which inventory costing method is most likely to be used by a company that sells perishable goods?
What is the effect of an error in ending inventory on the balance sheet?
What is the effect of an error in ending inventory on the balance sheet?
Which of the following statements is true regarding inventory errors and the income statement?
Which of the following statements is true regarding inventory errors and the income statement?
Which of the following is a possible consequence of an error in ending inventory?
Which of the following is a possible consequence of an error in ending inventory?
How does an error in ending inventory affect the beginning inventory of the following period?
How does an error in ending inventory affect the beginning inventory of the following period?
How does an error in ending inventory affect the calculation of cost of goods sold?
How does an error in ending inventory affect the calculation of cost of goods sold?
What is the potential impact of an inventory error on the next period's financial statements?
What is the potential impact of an inventory error on the next period's financial statements?
Which of the following textbook questions is assigned for individual work?
Which of the following textbook questions is assigned for individual work?
What type of inventory valuation method is not assigned as a group work question?
What type of inventory valuation method is not assigned as a group work question?
What is the main assumption of the FIFO (First-In, First-Out) method?
What is the main assumption of the FIFO (First-In, First-Out) method?
Which inventory costing method is best suited for tracking the actual physical flow of goods?
Which inventory costing method is best suited for tracking the actual physical flow of goods?
In a perpetual inventory system, when is a new weighted average cost calculated for the Average Cost method?
In a perpetual inventory system, when is a new weighted average cost calculated for the Average Cost method?
Which inventory costing method is often considered to best reflect the actual physical flow of merchandise?
Which inventory costing method is often considered to best reflect the actual physical flow of merchandise?
When is the specific identification method of inventory costing most likely to be suitable?
When is the specific identification method of inventory costing most likely to be suitable?
Why might the Average Cost method be preferred over the FIFO method in some situations?
Why might the Average Cost method be preferred over the FIFO method in some situations?
Which of the following would be a likely factor in deciding whether to use a perpetual or periodic inventory system?
Which of the following would be a likely factor in deciding whether to use a perpetual or periodic inventory system?
Which of the following is NOT a reason why the Average Cost method is often preferred over the FIFO method?
Which of the following is NOT a reason why the Average Cost method is often preferred over the FIFO method?
Flashcards
Specific Identification
Specific Identification
Tracks the actual physical flow of inventory items, marking each with its cost.
FIFO
FIFO
First-in, first-out; the oldest inventory items are sold first.
Average Cost Method
Average Cost Method
Calculates a new average cost per unit after each purchase.
Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS)
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Ending Inventory
Ending Inventory
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Perpetual Inventory System
Perpetual Inventory System
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Cost Flow Assumptions
Cost Flow Assumptions
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Inventory Errors Effects
Inventory Errors Effects
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Periodic vs. Perpetual Inventory
Periodic vs. Perpetual Inventory
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Inventory Valuation Methods
Inventory Valuation Methods
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Physical Inventory Count
Physical Inventory Count
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Financial Statement Effects
Financial Statement Effects
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Inventory Errors
Inventory Errors
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FIFO Method
FIFO Method
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Specific Identification Method
Specific Identification Method
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Replacement Cost
Replacement Cost
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Error Effects on Income Statement
Error Effects on Income Statement
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Beginning Inventory
Beginning Inventory
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Basic Accounting Equation
Basic Accounting Equation
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Balance Sheet Errors
Balance Sheet Errors
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Profit Reversal
Profit Reversal
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Study Notes
Kahoot!
- Interactive game-based learning platform.
Principles of Financial Accounting
- Canadian Edition.
- Chapter 6: Inventory Costing, prepared by Debbie Musil, Kwantlen Polytechnic University.
Learning Goals
- Compare periodic and perpetual inventory systems.
- Describe and apply inventory valuation methods (average cost, FIFO, specific identification).
- Explain the effects of different inventory valuation methods on financial statements.
Inventory Costing
- Determining inventory quantities: taking physical inventory, determining ownership of goods.
- Inventory cost determination methods: specific identification, cost formulas (FIFO, average).
- Financial statement effects: choice of cost determination method, inventory errors.
Chapter 6: Success Criteria
- Describe the steps in determining inventory quantities.
- Calculate cost of goods sold and ending inventory in a perpetual inventory system using specific identification, FIFO, and average cost methods.
- Explain financial statement effects of inventory cost determination methods.
- Determine financial statement effects of inventory errors.
Determining Inventory Quantities
- All companies count their inventory at least once a year to determine the amount and value of inventory to prepare accurate financial statements.
- Determination involves: taking a physical inventory of goods on hand and determining ownership of the goods.
Perpetual Inventory System: FIFO
- FIFO assumes the earliest goods are sold first.
- Costing: costs of oldest goods are recognized as cost of goods sold, and costs of most recent goods are recognized as ending inventory.
- Often reflects the actual physical flow of merchandise.
Perpetual System Inventory Costing: FIFO
- Ending inventory and cost of goods sold under FIFO are the same under perpetual and periodic systems.
Inventory Cost Determination
- Specific identification: tracks actual physical flow of goods, items are marked with their cost; used when goods are not interchangeable.
- Cost formulas: specific identification is not always suitable, instead use a cost formula such as first-in, first-out (FIFO), or average. Flow of costs may not match physical flow.
Inventory Costing in a Perpetual Inventory System
- FIFO: FIFO rule applied at the time of each sale.
- Average: new average cost per unit calculated after each purchase.
Textbook Questions
- Work on BYGO on page 266 together.
- Wynneck Sports Company uses a perpetual inventory system.
- All inventory items are sold for $10 per unit, and all sales and purchases are on account. (a) FIFO, (b) Average cost.
Textbook Questions
- Work on BE6-5, 6, 7, page 291-292.
Chapter 6: Success Criteria
- Describe steps in determining inventory quantities.
- Calculate cost of goods sold and ending inventory in a perpetual inventory system using specific identification, FIFO, and average methods.
- Explanation of financial statement effects of inventory cost determination methods.
- Determine financial statement effects of inventory errors.
Financial Statement Effects
- Income statement effects: when prices are rising, FIFO produces higher profit; when prices are falling, the opposite is true.
- Balance sheet effects: FIFO provides the most current valuation of inventory, and more closely approximates replacement cost.
- Cost formula should be consistent, enhance comparability of statements over time, and choose the method that best corresponds with actual physical flow, and make sure method aligns with accounting standards and practices.
Textbook Questions
- Work on BE6-9, 10, page 292
Inventory Errors
- Errors in inventory affect both the income statement and balance sheet through the calculation of cost of goods sold.
- Ending inventory of one period becomes beginning inventory of the next period.
- Errors in ending inventory carry over to the following period.
Income Statement Effects
- Effect of inventory errors on the current year's income statement (information given in a table format).
- Combined effect of errors for 2 years will be correct if the errors offset each other.
- An error in ending inventory of one period will have a reverse effect on profit of the next period.
Balance Sheet Errors
- Effect of errors can be determined by using the basic accounting equation: Assets = Liabilities + Owner's Equity.
- Ending inventory errors, understate or overstate, will have the same effect on both assets and owners' equity.
- An error in ending inventory in one period will cause an error in beginning inventory in the next period.
Textbook Questions
- Work on BE6-12, page 292.
Group Work Questions
- Group Assignments for inventory related problems. (Different groups are given different problems to work on).
Pop Quiz
- Work on E6-7, page 295.
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