Page 317 - Accounting Principles (A Business Perspective)

7. Measuring and reporting inventories

d. Specific identification.
e. Cannot determine.
Now turn to “Answers to self-test” at the end of the chapter to check your answers.

Questions

➢ Why is proper inventory valuation so important?
➢ Why does an understated ending inventory understate net income for the period by the same
amount?
➢ Why does an error in ending inventory affect two accounting periods?
➢ What is the meaning of taking a physical inventory?
➢ What is the accountant's responsibility regarding taking a physical inventory?
➢ Which cost elements are included in inventory? What practical problems arise by including the costs
of such elements?

➢ Which accounts that are used under periodic inventory procedure are not used under perpetual
inventory procedure?
➢ What entries are necessary under perpetual inventory procedure when goods are sold?
➢ Why is there closer control over inventory under perpetual inventory procedure than under periodic
inventory procedure?

➢ Why is perpetual inventory procedure being used increasingly in business?
➢ What is the cost flow assumption? What is meant by the physical flow of goods? Does a relationship
between cost flows and the physical flow of goods exist, or should such a relationship exist?
➢ Indicate how a company can manipulate its net income if it uses LIFO. Is the same opportunity
available under FIFO? Why or why not?
➢ What are the main advantages of using FIFO and LIFO?
➢ Which inventory method is the correct one? Can a company change inventory methods?
➢ Why are ending inventory and cost of goods sold the same under FIFO perpetual and FIFO periodic?
➢ Would you agree with the following statement? Reducing the amount of taxes payable currently is a
valid objective of business management and, since LIFO results in such a reduction, all businesses
should use LIFO.

➢ What is net realizable value, and how is it used?
➢ Why is it acceptable accounting practice to recognize a loss by writing down an item in inventory to
market, but unacceptable to recognize a gain by writing up an inventory item?
➢ Under what conditions would the gross margin method of computing an estimated inventory yield
approximately correct amounts?

➢ What are the main reasons for estimating ending inventory?
➢ Should a company rely exclusively on the gross margin method to determine the ending inventory
and cost of goods sold for the end-of-year financial statements?
➢ How can the retail method be used to estimate inventory?
➢ The Limited Based on the notes to the financial statements of The Limited contained in the Annual
Report Appendix, what inventory methods were used?

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