introduction chapters
chapter 8
Inventory
goals discussion goals achievement fill in the blanks multiple choice problems check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Identify three basic categories of inventory, and know where inventory is reported on the balance sheet.
What is meant by the term "F.O.B."?
How are goods in transit classified on the financial statements?
How are goods on consignment classified on the financial statements?
How is the matching principle fulfilled through inventory accounting?
Be able to apply inventory costing methods such as specific identification, FIFO, LIFO, and weighted average.
Distinguish between physical flow of goods and their cost flow for accounting purposes.
Know the general impacts of alternative cost flow assumptions, with special attention to the tax and financial statement results.
Must inventory methods be used consistently?
Distinguish between a periodic and a perpetual inventory system.
Be able to calculate ending inventory and cost of goods sold under a perpetual inventory system, using either the FIFO, LIFO, or moving average methods.
Understand how the accounting records are updated with a perpetual system (versus a periodic system).
What is the purpose of the lower-of-cost-or-market rule?
How is "market" generally defined in the lower-of-cost-or-market method?
Be able to perform lower-of-cost-or-market method computations.
Be able to record adjustments necessitated by the lower-of-cost-or-market method.
Understand the need for inventory estimates (e.g., gross profit method and retail method) and be able to perform related computations.
Be able to calculate and appreciate the inventory turnover ratio and the operating cycle.
Carefully consider the impact of various errors on the financial statements, and note the effect of these errors on subsequent accounting periods.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| conservatism | A general principle of accounting measurement; when in doubt understate assets and income and overstate liabilities |
| consignment | To place inventory in the custody of another party without requiring them to purchase it, as a sales agent |
| cost flow assumption | An assumption about how costs are assigned to inventory in the accounting records |
| first-in, first-out | FIFO; An inventory cost flow assumption based on the notion that the earliest costs are to be assigned to units sold |
| goods in transit | Goods in the process of being transported to the buyer; ownership is based on freight terms |
| gross profit method | An technique that purports to estimate inventory and cost of goods sold by applying historic percentage relationships to observable sales information |
| last-in, first-out method | LIFO; An inventory cost flow assumption based on the notion that the most recent costs are to be assigned to units sold |
| lower-of-cost-or-market | To report inventory at the lower of its cost or market value; market is generally defined as replacement cost |
| moving-average method | Under the perpetual inventory system; to recompute running average cost with each purchase transaction |
| physical inventory | The process of counting inventory actually on hand |
| retail inventory method | A inventory costing technique used by retailers that extrapolates inventory values by applying cost-to-retail percentages to known sales and purchase transactions |
| specific identification method | Inventory costing method where the actual cost of each unit of merchandise is tracked and used for accounting purposes |
| weighted-average inventory method | Under the periodic inventory system; inventory cost is based on the average cost of units purchased giving consideration to the quantities purchased at different prices |