ACCT322, Intermediate Accounting II
Study Guide for Test 1, Chapters 8-9
NOTE: It is vital to rework the assignments and be able to do similar problems and exercises on the
test. Theory and other questions can be studied by answering the following questions. You may bring
a 3 x 5 inch index card (or sheet of paper that size) with as much information squashed on both sides
as possible (but the index card should not have any flaps or folded pieces of paper attached to it).
But most important, bring a brain with both sides squashed with as much information as possible.
CHAPTER 8
1. What is the definition of inventory?
2. How are the types of inventories different in a retailing firm as compared to a manufacturing
firm?
3. What is a perpetual inventory system? A periodic inventory system? Which is better but more
difficult?
4. Do you know how to do general journal entries to record transactions under a periodic
inventory system? Under a perpetual inventory system?
5. Know what significance "FOB Shipping Point" or "FOB Destination" has concerning when
legal title of inventory is transferred and who pays for shipping costs.
6. Are goods on consignment included in the consignor's or consignee's inventory?
7. Should inventory be included on your balance sheet if you have temporarily "parked" it
somewhere else as part of a product financing or buyback arrangement?
8. Should sales be recorded if they have high rates of return which cannot be reasonable
estimated?
9. Do you know how to determine the effect of inventory errors on net income? On retained
earnings?
10. What happens to net income if inventory is intentionally or unintentionally overstated? Be able
to intelligently discuss the inventory fraud cases on the reading assignment in chapter 9.
11. What costs must be included in inventory?
12. Do you know how to record purchase discounts using the gross and net methods, under either
a periodic or a perpetual inventory system? Where do "purchase discounts" and "discounts
lost" appear on the financial statements? Which method is theoretically superior? Which
method would top management likely prefer?
13. What types of businesses would probably use the specific identification method? What are the
advantages and disadvantages of this method?
14. What is the average cost method called when a periodic inventory system is used? When a
perpetual inventory system is used? What are the advantages and disadvantages of the
average cost method?
15. When the FIFO method is used, is ending inventory and COGS the same under a periodic
and a perpetual inventory system? What are the advantages and disadvantages of the FIFO
method? Does FIFO result in a more accurate (current) income statement or balance sheet?
Why?
16. When the LIFO method is used, is ending inventory and COGS the same under a periodic and
a perpetual inventory system? Does LIFO result in a more accurate (current) income
statement or balance sheet? Why? What are the advantages and disadvantages of LIFO?
17. In periods of rising costs, does LIFO or FIFO result in a higher net income? Why? Where
would net income under the average cost method fall in relation to net income under
LIFO/FIFO?
18. What is a LIFO reserve? Do companies using LIFO have to disclose their LIFO reserves in
the notes to the financial statements?
19. Would companies trying to minimize their income tax liability likely prefer the LIFO or FIFO
method? Why? Why is there a LIFO conformity rule? Do international accounting standards
(IFRS) allow LIFO to be used?
20. What is LIFO liquidation? What would cause it? Is it good or bad?
21. What are the advantages of specific goods pooled LIFO over specific goods LIFO?
22. Is the number of units in inventory known under dollar-value LIFO? What are the advantages
of dollar-value LIFO over specific goods pooled LIFO?
23. Do you know how to calculate ending inventory under dollar-value LIFO, if given the
appropriate information? How are decreases in inventory treated? Is an old layer ever
recreated when inventory increases?
CHAPTER 9
1. Why do we abandon the historical cost principle when the market value of inventory is
considered to be lower than cost? Can you think of some specific examples of industries
where the “market value” of inventory might decline below the cost basis?
2. What is the definition of market?
3. Market is limited by a ceiling and a floor. How do you determine the ceiling? The floor? What
is the definition of net realizable value? What is the purpose of the ceiling and floor? Do
international accounting standards use the concept of a ceiling or floor?
4. Must LCM be applied directly to inventory on an individual item basis or can it be applied to
category totals or to the grand total of the inventory instead? Which of these alternatives
ordinarily results in an amount that more closely approaches cost? Why would a company use
the item-by-item alternative?
5. What are the two ways that inventory at market can be recorded in the accounts and financial
statements? Which method provides better disclosure? When is a recovery of a previous
write-down recorded? Can a recovery exceed the original cost?
6. Under what circumstances is it appropriate to record inventory at net realizable value? What
are examples of industries which commonly use net realizable value?
7. Understand when and how an unrealized loss should be recorded for purchase commitments.
8. Is the gross profit method of estimating ending inventory considered generally acceptable for
annual financial statements? For interim reports? For tax purposes? Be able to convert
markups based on cost to markups based on selling price (and vice versa) in order to
calculate ending inventory under the gross profit method.
9. Does a physical count have to be made in order to use the retail method or does the retail
method result in an estimated ending inventory?
10. What is the conventional retail method also known as? Does this method include markdowns
in the calculation of the cost/retail ratios? Why or why not?
11. Have a basic understanding of the inventory fraud cases that were reviewed. Particularly,
understand why inventory fraud is prominent and the different methods used by fraudsters to
overstate inventory.
12. Review how inventory accounting and reporting differs between U.S. GAAP and IFRS.
NOTE: If you feel that there will not be enough information covered on this test, come talk to me
and I’ll arrange for more to be added.