Ch_8_Ques_&_Brief_Exercises - ANSWERS TO QUESTIONS...

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ANSWERS TO QUESTIONS 1. In a retailing concern, inventory normally consists of only one category, that is the product awaiting resale. In a manufacturing enterprise, inventories consist of raw materials, work in process, and finished goods. Sometimes a manufacturing or factory supplies inventory account is also included. 2. (a) Inventories are unexpired costs and represent future benefits to the owner. A statement of financial position includes a listing of all unexpired costs (assets) at a specific point in time. Because inventories are assets owned at the specific point in time for which a statement of financial position is prepared, they must be included in order that the owners’ financial position will be presented fairly. (b) Beginning and ending inventories are included in the computation of net income only for the purpose of arriving at the cost of goods sold during the period of time covered by the statement. Goods included in the beginning inventory which are no longer on hand are expired costs to be matched against revenues earned during the period. Goods included in the ending inventory are unexpired costs to be carried forward to a future period, rather than expensed. 3. In a perpetual inventory system, data are available at any time on the quantity and dollar amount of each item of material or type of merchandise on hand. A physical inventory means that inventory is periodically counted (at least once a year) but that up-to-date records are not necessarily maintained. Discrepancies often occur between the physical count and the perpetual records because of clerical errors, theft, waste, misplacement of goods, etc. 4. No. Mariah Carey, Inc. should not report this amount on its balance sheet. As consignee, it does not own this merchandise and therefore it is inappropriate for it to recognize this merchandise as part of its inventory. 5. Product financing arrangements are essentially off-balance-sheet financing devices. These arrange-ments make it appear that a company has sold its inventory or never taken title to it so they can keep loans off their balance sheet. A product financing arrangement should not be recorded as a sale. Rather, the inventory and related liability should be reported on the balance sheet. 6. (a) Inventory. (b) Not shown, possibly in a note to the financial statements if material. (c) Inventory. (d) Inventory, separately disclosed as raw materials. (e) Not shown, possibly a note to the financial statements. (f) Inventory or manufacturing supplies. 7. This omission would have no effect upon the net income for the year, since the purchases and the ending inventory are understated in the same amount. With respect to financial position, both the inventory and the accounts payable would be understated. Materiality would be a factor in determining whether an adjustment for this item should be made as omission of a large item would distort the amount of current assets and the amount of current liabilities. It, therefore, might influence the current ratio to a considerable extent.
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8. Cost, which has been defined generally as the price paid or consideration given to
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Ch_8_Ques_&_Brief_Exercises - ANSWERS TO QUESTIONS...

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