MUHASEBE I

First-In, First-Out (FIFO) Method is an inventory costing method in which the first costs into inventory are the first costs out to cost of goods
sold. Ending inventory is based on the costs of the most recent purchases.

Inventory Turnover Ratio measures number
of times a company sells average level of
merchandise inventory during a period.

The consistency principle holds that companies should use the same accounting methods and procedures in each accounting period, so that the information provided will help investors and creditors to compare a company’s financial statements from one period to the next. For example, assume that you are analyzing a company’s net income over a two-year period in which there was a decrease in net income from the first year to the second. Analysis of the income statement shows that Sales Revenue was almost the same for both years, but Cost of Goods Sold increased significantly, which resulted in decreases in gross profit and operating income. A is the right answer

Conservatism in accounting means being careful in reporting items in the financial statements. Conservatism follows these ideas: 
• Anticipate no gains, but provide for all probable losses.
• If in doubt, record an asset the lowest reasonable amount and reliability at the highest reasonable amount.
• When there is a question, record an expense rather than an asset.
• When you are faced with a decision between two possible options, you must choose the option that undervalues, rather than overvalues, your business

E is the right answer.

Periodic Inventory System is an inventory system which relies upon physical count of the inventory to determine the ending inventory balance and cost of goods sold. In other words, no effort is made to keep up-todate records of either the inventory or cost of goods sold, physical count of inventory is made at specific intervals. B is the right answer.

Companies determine the number of units from perpetual inventory records backed up by a physical count. The cost of each unit of inventory is as follows:

Cost per unit = Purchase price – Purchase discounts – Purchase returns + Freight in

C is the right answer.

In order to find out the reporting value for inventories on hand, we have to compare cost with market value. E is the right answer.

Having the ability to measure inventory in a timely and accurate manner is critical for having uninterrupted business operations since inventory is often one of the largest current assets on a company’s balance sheet. An error in ending merchandise inventory creates a whole string of errors in other related accounts. So, businesses have to perform a physical count of their merchandise inventory at the end of each accounting period to report their inventories with correct values. B is the right answer.

A manufacturing company produces goods and usually sells them to merchandising firms. Although the products they produce may differ, manufacturers normally have three inventory accounts in their financial statements: raw materials, work in process, and finished goods.
Raw Materials Inventory reports the cost of goods and
materials on hand which will be used in production.
Work in Process Inventory reports the cost of goods, materials and other components of manufacturing process used for the inventory which are still in production process, in other words unfinished at the time financial statements are prepared.
Finished Goods Inventory reports the cost of goods, materials and other components of manufacturing process used for the inventory produced and available for sale. A is the right answer

The consistency principle holds that companies should use the same accounting methods and procedures in each accounting period, so that the information provided will help investors and creditors to compare a company’s financial statements from one period to the next. For example, assume that you are analyzing a company’s net income over a two-year period in which there was a decrease in net income from the first year to the second. Analysis of the income statement shows that Sales Revenue was almost the same for both years, but Cost of Goods Sold increased significantly, which resulted in decreases in gross profit and operating income. D is the right answer.

The perpetual inventory system keeps a running computerized record of merchandise inventory, that is, the number of inventory units and the money amounts associated with the inventory are perpetually (continuously)
updated.
This system achieves better control over the inventory by recording the following information:

• Units purchased and cost amounts
• Units sold and sales and cost amounts
• The quantity of merchandise inventory on hand and its cost.

B is the right answer.

The specific identification method uses the specific cost of each inventory unit to determine ending inventory and cost of goods sold. Specific identification requires that companies keep records of the original cost of each individual inventory item. In the specific identification method, the company knows exactly which item was sold and exactly what the item cost.4 The specific identification method is impractical unless each unit can be identified accurately. This costing method is best for businesses that sell unique, easily identified inventory items, such as jeweler (a specific diamond earring), an automobile dealer (each automobile has a unique serial number) and real estate (identified by address). This method requires the business maintains detailed records of inventory sales and purchases as well as carefully identifying the inventory sold.E is the right answer.

The consistency principle holds that companies should use the same accounting methods and procedures in each accounting period, so that the information provided will help investors and creditors to compare a company’s financial statements from one period to the next. For example, assume that you are analyzing a company’s net income over a two-year period in which there was a decrease in net income from the first year to the second. The correct answer is C.

The disclosure principle holds that a company should report enough information for financial statement users to understand methods and procedures used for each component of the financial statements to make wise decisions about the company by providing additional information. The correct answer is C.

Periodic Inventory System is an inventory system which relies upon physical count of the inventory to determine the ending inventory balance and cost of goods sold. In other words, no effort is made to keep up-todate records of either the inventory or cost of goods sold, physical count of inventory is made at specific intervals. The periodic inventory system requires businesses to obtain a physical count of inventory to determine quantities on hand. The system is normally used for relatively inexpensive goods, such as in a small, local store without optical-scanning cash registers that does not keep a running record of every loaf of bread and every key chain that it sells. The correct answer is A.

The average cost method allocates the cost of goods available for sale on the basis of the weighted average unit cost incurred. The average cost method assumes that goods are similar in nature. When the average cost method is used in a perpetual inventory system, the business computes a new weighted average cost per unit after each purchase. This unit cost is then used to determine the cost of each sale until another purchase is made and a new average is computed. Ending inventory and cost of goods sold are then based on the same average cost per unit. The correct answer is A.

Last-in, First-out (LIFO) is just the opposite of FIFO. Under the last-in, first-out (LIFO) method, ending inventory comes from the oldest costs (beginning inventory and earliest purchases) of the period. The cost of goods sold is based on the most recent purchases (new costs) –that is, the last units in are assumed to be the first units out of the warehouse (sold). This method is forbidden for being misleading especially in hyperinflationary economies. The correct answer is E.

The average cost method allocates the cost of goods available for sale on the basis of the weighted average unit cost incurred. The average cost method assumes that goods are similar in nature. When the average cost method is used in a perpetual inventory system, the business computes a new weighted average cost per unit after each purchase. This unit cost is then used to determine the cost of each sale until another purchase is made and a new average is computed. Ending inventory and cost of goods sold are then based on the same average cost per unit. The correct answer is E.

Last-in, First-out (LIFO) is just the opposite of FIFO. Under the last-in, first-out (LIFO) method, ending inventory comes from the oldest costs (beginning inventory and earliest purchases) of the period. The cost of goods sold is based on the most recent purchases (new costs) –that is, the last units in are assumed to be the first units out of the warehouse (sold). This method is forbidden for being misleading especially in hyper-inflationary economies. The correct answer is B.

The materiality concept states that a company must perform strictly proper accounting only for significant items.2 Information is significant (material in accounting terms) when it would cause someone to change a decision. The most important point about this concept is to understand what is significant or material. The correct answer is D.