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Unformatted text preview: CHAPTER 8 INVENTORIES CLASS DISCUSSION QUESTIONS 1. To protect inventory from customer theft, re- tailers use two-way mirrors, cameras, secur- ity guards, locked display cabinets, and in- ventory tags that set off an alarm if the in- ventory is removed from the store. 2. Perpetual. The perpetual inventory system provides the more effective means of con- trolling inventories, since the inventory ac- count is updated for each purchase and sale. This also assists managers in determ- ining when to reorder inventory items. 3. The receiving report should be reconciled to the initial purchase order and the vendor's invoice before recording or paying for in- ventory purchases. This procedure will verify that the inventory received matches the type and quantity of inventory ordered. It also verifies that the vendor's invoice is charging the company for the actual quantity of in- ventory received at the agreed-upon price. 4. An employee should present a requisition form signed by an authorized manager be- fore receiving inventory items from the com- pany's warehouse. 5. A physical inventory should be taken period- ically to test the accuracy of the perpetual records. 6. a. Gross profit for the year was overstated by $18,500. b. Merchandise inventory and stockhold- ers equity (retained earnings) were overstated by $18,500. 7. Fess Company. Since the merchandise was shipped FOB shipping point, title passed to Fess Company when it was shipped and should be reported in Fess Company's financial statements at December 31, the end of the fiscal year. 8. Manufacturer's 9. No, they are not techniques for determining physical quantities. The terms refer to cost flow assumptions, which affect the determin- ation of the cost prices assigned to items in the inventory. 10. No, the term refers to the flow of costs rather than the items remaining in the in- ventory. The inventory cost is composed of the earliest acquisitions costs rather than the most recent acquisitions costs. 11. a. Fifo c. Fifo b. Lifo d. Lifo 12. Fifo 13. Lifo. In periods of rising prices, the use of lifo will result in the lowest net income and thus the lowest income tax expense. 14. Yes. The inventory method may be changed for a valid reason. The effect of any change in method and the reason for the change should be fully disclosed in the financial statements for the period in which the change occurred. 15. Net realizable value (estimated selling price less any direct cost of disposition, such as sales commissions). 16. By a notation next to "merchandise invent- ory" on the balance sheet or in a footnote to the financial statements. 17. Inventories estimated by the gross profit method are useful in preparing interim state- ments and in establishing an estimate of the cost of merchandise destroyed by fire or other disasters....
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- Spring '07