Answer a merchandisers ability to pay its short term

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College Accounting, Chapters 1-27
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Chapter 13 / Exercise 2
College Accounting, Chapters 1-27
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Answer: A merchandiser's ability to pay its short term obligations depends, among other factors, on how quickly it sells its merchandise inventory. The inventory turnover ratio reveals how many times a company turns over (sells) its inventory during a period. A low ratio compared to competitors suggests the company may be holding more inventory than necessary to support its sales volume. On the other hand, a ratio that is too high compared to competitors may suggest that the inventory level is too low and customers may have to back order merchandise. The days' sales in inventory ratio helps to better interpret inventory turnover. It can be interpreted as the number of days one can sell from inventory if no new items are purchased, and can be viewed as a measure of the buffer against out-of-stock inventory. AICPA BB: Industry AICPA BB: Critical Thinking AICPA FN: Decision Making AICPA FN: Measurement AICPA FN: Reporting AICPA FN: Research AACSB: Communications AACSB: Analytic AACSB: Reflective Thinking Difficulty: Medium Learning Objective: P1 141. Identify and describe the four inventory valuation methods. Answer: The specific identification method assigns costs to each inventory item based on specific invoice costs. The weighted average method assigns costs by using the total balance in inventory and dividing it by the number of units to arrive at a cost per unit at each sale. The first-in-first- out method assigns cost to items sold assuming that the first units purchased are the first to be sold. The last-in-first out method assumes that the last units purchased are the first to be sold. AICPA BB: Industry AICPA BB: Critical Thinking AICPA FN: Decision Making AICPA FN: Measurement AICPA FN: Reporting AACSB: Communications AACSB: Analytic AACSB: Reflective Thinking 196
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College Accounting, Chapters 1-27
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Chapter 13 / Exercise 2
College Accounting, Chapters 1-27
Heintz/Parry
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Difficulty: Medium Learning Objective: P2 142. Explain why the lower of cost or market rule is used to value inventory. Answer: The principle of conservatism requires that if there is more than one estimate of the value of an asset, then the lower of the two should be used. The lower of cost or market rule compares the acquisition cost of inventory with the current replacement cost. The lower of these two values is then selected as the amount to be reported. AICPA BB: Industry AICPA BB: Critical Thinking AICPA FN: Decision Making AICPA FN: Measurement AICPA FN: Reporting AACSB: Communications AACSB: Analytic AACSB: Reflective Thinking Difficulty: Hard Learning Objective: P3 143. Discuss the important accounting features of a periodic inventory system including accounts and procedures used. Answer: Each purchase of merchandise is debited to the Purchases account. Cost of goods sold is not recorded at the time of sale. Instead, a physical count of inventory at the end of the accounting period is used to determine the amount of inventory sold. Certain costs of inventory such as transportation-in, purchases discounts, and purchases returns and allowances are recorded

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