Chapter_06_SM_1.htm - $ 3,338 $11,864 Chapter 6 Inventories...

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Chapter 6Inventories and Cost of SalesQUESTIONS1. (a) FIFO: The cost of the first (earliest) items purchased in inventory flow to cost of goodssold first. (b) LIFO: The cost of the last (most recent) items purchased in inventory flow tocost of goods sold first.2. Merchandise inventory is disclosed on the balance sheet as a current asset. It is alsosometimes reported in the income statement as part of the calculation of cost of goods sold.3. Incidental costs sometimes are ignored in computing the cost of inventory because theexpense of tracking such costs on a precise basis can outweigh the benefits gained from theincreased accuracy. The accounting constraint of materialitypermits such practices whenthe effects on the financial statements are not significant (that is, when such practices donot impact business decisions).4. LIFO will result in the lower cost of goods sold when costs are declining because it assignsthe most recent, lower cost purchases to cost of goods sold.5. The full-disclosure principle requires that the nature of the accounting change, thejustification for the change, and the effect of the change on net income be disclosed in thenotes or in the body of a company's financial statements.6. No; changing the inventory method each period would violate the accounting concept ofconsistency. 7. No; the consistency concept does not preclude changes in accounting methods from everbeing made. Instead, a change from one acceptable method to another is allowed if thecompany justifies the change as an improvement in financial reporting.8. Many people make important business decisions based on period-to-period fluctuations in acompany's financial numbers, including gross profit and net income. As such, inventoryerrors—which can substantially impact gross profit, net income, current assets, and cost ofsales—should not be permitted to cause such fluctuations and impair business decisions. (Note: Since such errors are “self-correcting,” they will distort net income in only twoconsecutive accounting periods—the period of the error and the next period.)
$ 3,338$11,864
9. An inventory error that causes an understatement (or overstatement) for net income in oneaccounting period, if not corrected, will cause an overstatement (or understatement) in thenext. Since an understatement (overstatement) of one period offsets the overstatement(understatement) in the next, such errors are said to correct themselves.10. Market usually means replacement cost of inventory when applied in the LCM.11. The accounting constraint of conservatism guides preparers of accounting reports to selectthe less optimistic estimate in uncertain situations where two estimates of amounts areabout equally likely. Users of information must also be cognizant of the potentialconservatism in accounting reports when making business decisions.

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