Principles of Accounting: Chapter Eight

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Chapter 8 identifies the appropriate items to include inventory, including the treatment of goods in transit and consigned goods. Further, a company must allocate total cost of goods available for sale (beginning inventory plus purchases) between ending inventory and cost of goods sold. This requires the adoption of a costing technique. Methods include first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average. These techniques attribute cost to units based on the assumed cost flow pattern, and each is illustrated in the chapter. Inventory costing can be applied on either a periodic or perpetual basis.

In addition to assigning costs to units, it is also necessary to assess whether inventory value is impaired. This requires implementation of lower-of-cost-or-market testing, which is a two-step process to identify "market" and then compare that value to cost. The chapter continues with an examination of the gross profit technique for preparing inventory estimates, and the retail method that is quite useful if specific conditions are met. The chapter concludes by examining inventory management, the inventory turnover ratio, and the effects of errors.

Exercises

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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms

Fill in the Blanks: Chapter Eight

1. For a manufacturer, inventories can be divided into categories such as ____________ raw materials, ____________work in process , and ____________finished goods .

2. Legal ownership of inventory is dependent on freight terms, namely F.O.B. ____________shipping point and F.O.B ____________destination.

3. The ____________consignor is the legal owner of goods on consignment.

4. The process of counting an inventory is called taking a ____________physical inventory.

5. ____________Beginning inventory plus ____________net purchases equals ____________cost of goods available, which can be divided into ____________cost of goods sold for reporting on the income statement and ____________ending inventory for reporting on the balance sheet.

6. The ____________specific identification method requires a business to identify each unit of merchandise with the unit's cost, and retain that identification until the inventory is sold.

7. Under the ____________LIFO inventory method, the most recent costs incurred are assigned to cost of goods sold on the income statement.

8. The ____________FIFO inventory method would cause income to be the highest during a period of rising prices.

9. ____________Consistency requires that accounting and valuation methods be used on a regular basis from year to year.

10. The perpetual inventory system can be executed under the ____________FIFO method, ____________LIFO method, or ____________moving-average method.

11. Under the perpetual system, when inventory is sold, the ____________cost of goods sold account is debited and ____________inventory is credited. The ____________purchases account, which is used with a periodic system, is not used with the perpetual system.

12. Under the lower-of-cost-or-market method, market is defined as ____________replacement cost not to exceed ____________net realizable value nor to be less than ____________net realizable value minus a ____________normal profit margin.

13. The ____________gross profit method estimates inventory on the basis of a company's gross profit rate.

14. The ____________retail method is widely used by merchandising firms to value or estimate ending inventory.

15. Understating beginning inventory would cause income for that year to be ____________overstated.