CHAPTER%206 - CHAPTER 6 Reporting and Analyzing Inventory...

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CHAPTER 6 Reporting and Analyzing Inventory ANSWERS TO QUESTIONS 1. Agree. Effective inventory management is frequently the key to successful business operations. Management attempts to maintain sufficient quantities and types of goods to meet expected customer demand. It also seeks to avoid the cost of carrying inventories that are clearly in ex-cess of anticipated sales. 2. Inventory items have two common characteristics: (1) they are owned by the company and (2) they are intended to be sold to customers in the ordinary course of business. 3. Just-in-time inventory management is the practice of manufacturing or purchasing inventory “just-in-time” to fill a sales order. Since inventory quantities are kept at very low amounts, just-in-time man-agement reduces the costs associated with carrying inventory as well as the risk of obsolescence. 4. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. Retailers, such as hardware stores, generally have thousands of different items to count. This is normally done when the store is closed. Carol will probably count items and mark the quantity, description, and inventory number on prenumbered inventory tags. 5. (a) (1) The goods will be included in Michelle Company’s inventory if the terms of sale are FOB destination. (2) They will be included in Matthew Corporation’s inventory if the terms of sale are FOB shipping point. (b) Michelle Company should include goods shipped to a consignee in its inventory. Goods held by Michelle Company on consignment should not be included in inventory. 6. Inventoriable costs are $3,035 (invoice cost $3,000 + freight charges $95 - purchase discounts $60). The amount paid to negotiate the purchase is a buying cost that normally is not included in the cost of inventory because of the difficulty of allocating these costs. Buying costs are ex-pensed in the year incurred. 7. The primary basis of accounting for inventories is cost in accordance with the cost principle. The major objective of accounting for inventories is the proper determination of net income in accor-dance with the matching principle. 8. Actual physical flow may be impractical because many items are indistinguishable from one
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able to mani-pulate net income through specific identification of items sold. 9. The major advantage of the specific identification method is that it tracks the actual physical flow of the goods available for sale. The major disadvantage is that management could manipulate net income. 10. No. Selection of an inventory costing method is a management decision. However, once a method has been chosen, it should be consistently applied. 11.
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This note was uploaded on 04/09/2008 for the course MGT 202 taught by Professor Normancolter during the Spring '08 term at New Mexico.

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CHAPTER%206 - CHAPTER 6 Reporting and Analyzing Inventory...

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