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Business LibreTexts

6.9: Discussion Questions

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    1. Explain the importance of maintaining appropriate inventory levels for
      1. management; and
      2. investors and creditors.
    2. What aspects of accounting for inventory on financial statements would be of interest to accountants?
    3. What is meant by the laid-down cost of inventory?
    4. How does a flow of goods differ from a flow of costs? Do generally accepted accounting principles require that the flow of costs be similar to the movement of goods? Explain.
    5. What two factors are considered when costing merchandise for financial statement purposes? Which of these factors is most difficult to determine? Why?
    6. Why is consistency in inventory valuation necessary? Does the application of the consistency principle preclude a change from weighted average to FIFO? Explain.
    7. The ending inventory of CBCA Inc. is overstated by $5,000 at December 31, 2018. What is the effect on 2018 net income? What is the effect on 2019 net income assuming that no other inventory errors have occurred during 2019?
    8. When should inventory be valued at less than cost?
    9. What is the primary reason for the use of the LCNRV method of inventory valuation? What does the term net realisable value mean?
    10. When inventory is valued at LCNRV, what does cost refer to?
    11. What inventory cost flow assumptions are permissible under GAAP?
    12. Why is estimating inventory useful?
    13. How does the estimation of ending inventory differ between the gross profit method and the retail inventory method? Use examples to illustrate.
    14. When is the use of the gross profit method particularly useful?
    15. Does the retail inventory method assume any particular inventory cost flow assumption?