1.
a.
Determine the reason why does an inventory need to be counted.
1.
a.
Answer to Problem 1DQ
The inventory is counted in order to ensure that the inventory recorded According to the perpetual inventory, truly represents the inventory on hand.
Explanation of Solution
Perpetual Inventory System:
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases, and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
1.
b.
Describe the situation that would happen if the count was done incorrectly.
1.
b.
Answer to Problem 1DQ
If the count was done incorrectly, it would either understate the ending inventory or overstate the ending inventory. This is because to match the physical count the inventory account is adjusted.
Explanation of Solution
Ending Inventory:
It represents the quantity and price of the goods unsold and laying at the store at the end of a particular period.
c.
Describe the terms FIFO and LIFO that has to do with inventory.
c.
Answer to Problem 1DQ
The terms FIFO and LIFO has the flow of inventory costs to do with inventory through the records of accounting.
Explanation of Solution
First-in-First-Out method:
In First-in-First-Out method, the costs of the initially purchased items are considered as cost of goods sold, for the items which are sold first. The cost of merchandise sold is calculated by adding all the total cost of merchandise sold during the month. The value of the ending inventory consists of the recent purchased items.
Last-in-Last-Out:
In Last-in-First-Out method, the costs of last purchased items are considered as the cost of goods sold, for the items which are sold first. The value of the closing stock consists of the initial purchased items.
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Chapter 5 Solutions
Financial Accounting, Student Value Edition (4th Edition)
- Which of the following is a disadvantage of the perpetual inventory system? A. Inventory information is in real-time. B. Inventory is automatically updated. C. It allows managers to make current decisions about purchases, stock, and sales. D. It is cost-prohibitive.arrow_forwardHow long does it take an inventory error affecting ending inventory to correct itself in the financial statements? Explain.arrow_forwardDoes the use of a perpetual system eliminate the need for taking a physical inventory count?arrow_forward
- One reason for inventory is to prevent shutdowns. How does the JIT approach to inventory management deal with this potential problem?arrow_forwardWhat does an increase in inventory imply? How would this increase in inventory be reported under the indirect method?arrow_forwardWhy do consignment arrangements present a challenge in inventory management? Explain.arrow_forward
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