SM_CH07 cond - CHAPTER 7 7-1 Sales transactions are...

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Unformatted text preview: CHAPTER 7 7-1 Sales transactions are accompanied by recording of the cost of goods sold (or cost of sales). This is literally true under the perpetual system and conceptually descriptive under the periodic system. 7-2 The two steps are obtaining (1) a physical count and (2) a cost valuation. 7-3 Perpetual systems provide continuous inventory and cost of goods sold records. Periodic systems rely on physical inventory taking to record cost of goods sold at the end of the period. 7-4 It is true that the periodic method requires a physical count to measure cost of goods sold and the perpetual method does not. However, for control purposes, it is important to undertake at least annual physical counts of inventory under the perpetual method, as well. 7-5 F.O.B. destination means the shipper pays the freight bill. F.O.B shipping point means the customer bears the cost of the freight bill. F.O.B. stands for "free on board." 7-6 Freight out is not shown as a direct offset to sales. Unlike sales discounts and returns, freight out is not a part of gross revenue that never gets collected . Instead, it is an expense, entailing ordinary cash disbursements . 42 7-7 The four methods are: 1. Specific identification charges the actual cost of the specific item sold. 2. FIFO items purchased first are assumed to be sold first. 3. LIFO items purchased most recently are assumed to be sold first. 4. Weighted average the average cost of all items available is charged for each item sold. 7-8 The specific identification method is normally used for low volume, high value items. Therefore, we would expect this to be used for a, b, d, and f. 7-9 Yes. Under FIFO the oldest costs are assigned to the cost of goods sold first, so the timing of purchases cannot affect cost flows. 7-10 The good news is that LIFO reduces taxes in times of rising prices. The bad news is that reported profit is lower. 7-11 Yes. Purchases under LIFO can affect income immediately, because the unit costs of the latest purchases are assigned to units sold. 7-12 No. The weighted average must take into account the number of units purchased at each price. For Gamma Company, the weighted average unit cost of inventory is: [(2 x $4.00) + (3 x $5.00)] 5 = $4.60. 7-13 Ending inventory is lower under LIFO in a period of rising prices and constant or growing inventory. FIFO produces the higher ending inventory value. 43 7-14 Falling prices reverse the normal relation, so FIFO produces higher cost of goods sold and, therefore, lower net earnings. This helps explain why computer and electronics firms typically use FIFO in order to lower their taxes. 7-15 Consistency requires the maintaining of constant accounting methods from period to period. Switching accounting methods hinders comparisons of current results to those of preceding periods....
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SM_CH07 cond - CHAPTER 7 7-1 Sales transactions are...

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