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385 CHAPTER 6 INVENTORIES EYE OPENERS 1. The receiving report should be reconciled to the initial purchase order and the vendor’s invoice before recording or paying for inven- tory 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 inven- tory received at the agreed-upon price. 2. To protect inventory from customer theft, retailers use two-way mirrors, cameras, se- curity guards, locked display cabinets, and inventory tags that set off an alarm if the in- ventory is removed from the store. 3. 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 deter- mining when to reorder inventory items. 4. A physical inventory should be taken peri- odically to test the accuracy of the perpetual records. In addition, a physical inventory will identify inventory shortages or shrinkage. 5. No, they are not techniques for determining physical quantities. The terms refer to cost flow assumptions, which affect the determi- nation of the cost prices assigned to items in the inventory. 6. No, the term refers to the flow of costs rather than the items remaining in the inven- tory. The inventory cost is composed of the earliest acquisitions costs rather than the most recent acquisitions costs. 7. a. LIFO c. LIFO b. FIFO d. FIFO 8. FIFO 9. LIFO. In periods of rising prices, the use of LIFO will result in the lowest net income and thus the lowest income tax expense. 10. 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. 11. Net realizable value (estimated selling price less any direct cost of disposition, such as sales commissions). 12. By a notation next to “Merchandise inven- tory” on the balance sheet or in a note to the financial statements. 13. a. Gross profit for the year was under- stated by $12,750. b. Merchandise inventory and stockhold- ers’ equity (retained earnings) were un- derstated by $12,750. 14. Jaffe Company. Since the merchandise was shipped FOB shipping point, title passed to Jaffe Company when it was shipped and should be reported in Jaffe Company’s fi- nancial statements at December 31, the end of the fiscal year. 15. Manufacturer’s; The manufacturer retains title until the goods are sold. Thus, any un- sold merchandise at the end of the year is part of the manufacturer’s (consignor’s) in- ventory, even though the merchandise is in the hands of the retailer (consignee).
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386 PRACTICE EXERCISES PE 6–1A Gross Profit Ending Inventory a. First-in, first-out (FIFO) $23 ($53 – $30) $78 ($36 + $42) b. Last-in, first-out (LIFO) $11 ($53 – $42) $66 ($30 + $36)
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