Explain why proper inventory valuation is so important to the calculation of a company's “bottom line” net income.
§ Explain why proper inventory valuation is so important to the calculation of a company's “bottom line” net income.
§ What is the meaning of taking a physical inventory and why is it important to take a physical inventory when using a perpetual inventory system.
§ Explain the accountant's role regarding taking a physical inventory.
· What is the cost flow assumption?
· What is meant by the physical flow of goods?
· What relationship exists between cost flows and the physical flow of goods in a company?
· To place the proper valuation on inventory, a business must determine which costs should be included in inventory cost. Getting goods ready to sell should include what items?
§ Identify and describe each of the four most commonly used inventory valuation methods. What are the main advantages of each method?
§ Identify the main disadvantages of each inventory valuation method.
§ If inventory is being valued at cost and the price level is steadily rising, which of the following three methods of costing—FIFO, LIFO, or weighted average cost—will yield the lowest annual after tax net income?
§ Which method will yield the highest after tax net income in a scenario where the price level is steadily declining?
§ Which of the three methods of inventory will in general yield an inventory cost most nearly approximating current replacement cost?
§ Some circumstances justify departures from the historical cost approaches of FIFO, LIFO, and weighted average cost. Several additional inventory methods may be used when circumstances warrant. Identify and describe each of these alternative methods. Include an example of when each method may be applied.
§ Identify which methods could be used to determine whether there has been shrinkage or shortage in the physical inventory.
§ Identify and describe the ratio that can be used to analyze a company's inventory.
§ What does the ratio measure? What are the components of the ratio? How is the ratio computed?
§ How does a company know if the results of the calculation are helping or hurting the company's financial health?
§ Given the following information, calculate the inventory turnover for Lincoln Company, a large grocery store chain. Evaluate the trend results.
§ 2014: Cost of goods sold—$1,043,000; Beginning inventory—$283,000; Ending inventory—$264,000.
§ 2013: Cost of goods sold—$820,000; Beginning inventory—$311,000; Ending inventory—$283,000.
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