Solutions 6 - Chapter 6 Merchandise Inventory Review...

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Chapter 6 Merchandise Inventory Review Questions 1. The consistency principle states that businesses should use the same accounting methods and procedures from period to period. 2. The disclosure principle requires that a company must report enough information in its financial statements for outsiders to make knowledgeable decisions about the company. 3. The materiality concept states that a company must perform strictly proper accounting only for significant items. Information is significant—or, in accounting terms, material—when it would cause someone to change a decision. The amount that is material for a company with annual sales of $10,000 is not the same as the amount that is material for a company with annual sales of $1,000,000. For example, $1,000 is 10% of $10,000 but is only 0.1% of $1,000,000. Thus, $1,000 is material for a company with annual sales of $10,000 but not for a company with annual sales of $1,000,000. 4. Conservatism in accounting means exercising caution in reporting items in the financial statements. A company should report the least favorable figures in the financial statements when two or more possible options are presented. The goal of conservatism is to report realistic figures and to never overstate assets or net income. 5. Maintaining goods controls over merchandise inventory is very important for a merchandiser. Good controls ensure that inventory purchases and sales are properly authorized and accounted for by the accounting system. This can be accomplished by taking the following measures: Ensure merchandise inventory is not purchased without proper authorization, including purchasing only from approved vendors and within acceptable dollar ranges. After inventory is purchased, the order should be tracked and properly documented when received. At time of delivery, a count of inventory received should be completed and each item should be examined for damage. Damaged inventory should be properly recorded and then should be used, disposed of, or returned to the vendor. A physical count of inventory should be completed once a year to track inventory shrinkage due to theft, damage, and errors. When sales are made, the inventory sold should be properly recorded and removed from the inventory count. This will reduce the likelihood of stockouts. Horngren’s Accounting   10/e    Solutions Manual 6-1

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