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Unformatted text preview: CHAPTER 7 COVERAGE OF LEARNING OBJECTIVES LEARNING OBJECTIVES QUESTIONS EXERCISES PROBLEMS OTHER LO1: Link inventory valuation to gross profit. 25,26,30 34,35,37,46, 47 LO2: Use both perpetual and periodic inventory systems. 1,2,3,4,24,33 36,40,44,45 55,56,85 LO3: Calculate the cost of merchandise acquired. 5,6 38,39,41,42, 43,52 LO4: Compute income and inventory values using the three principal inventory valuation methods allowed under both U.S.GAAP and IFRS, and the one method allowed only by U.S. GAAP. 7,8,9,10,12, 13,14,32 50 58,59,63,64, 65,66,70, 72,74,75 89,90 LO5: Use the lower-of- cost-or-market method to value inventories under both U.S.GAAP and IFRS 21,22 51 61,77 LO6: Show the effects of inventory errors on financial statements. 23,31 48 62,69,80,86 88 LO7: Evaluate the gross profit percentage and inventory turnover. 49,53,54 57,83 LO8: Describe characteristics of LIFO and how they affect the measurement of Income (Appendix 7A) 11,16,17,18, 27,28 60,67,68,71, 73,76,78,79, 81,82,84 LO9: Determine inventory costs for a manufacturing company (Appendix 7B). 2,29 87 Chapter 7 Inventories and Cost of Goods Sold 227 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 taking a physical inventory to calculate and 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. The difference between what the accounting records show and the physical count will be due to theft, spoilage, or other unrecorded changes. 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. The terms also describe whether the seller or buyer owns the goods while they are in transit. 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 . 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....
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This note was uploaded on 05/05/2011 for the course MSANDE 240 taught by Professor Stanston during the Spring '11 term at Stanford.
- Spring '11