Assignment: Principles of Accounting
1. What are the three different inventory cost flow assumptions commonly used in commerce today and allowed by generally accepted accounting principles? Pick one and describe in detail how it works. How does your company, or a company you are familiar with, determine what cost flow assumption it should use?
2. How do the three inventory cost flow assumptions compare when reporting profit in the income statement and inventory on the balance sheet in a period of rising prices?
3. Describe the lower of cost or market inventory valuation method and why it is used. How does this follow the convention in conservatism in accounting?
4. In your own words describe the inventory turnover ratio and days in inventory calculation. Why are these calculations important to merchandising companies?
5. What is the primary basis of accounting for inventories?
6. What is the major advantage and major disadvantage of the specific identification method of inventory costing?
7. Why is it inappropriate for a company to include freight-out expense in the Cost of Goods Sold account?
8. How does the average-cost method of inventory costing differ between a perpetual inventory system and a periodic inventory system?