Chapter 6
Merchandise Inventory
Review Questions
1. Which principle states that businesses should use the same accounting methods and procedures from
period to period?
2. What does the disclosure principle require?
3. Discuss the materiality concept. Is the dollar amount that is material the same for a company that has
annual sales of $10,000 compared with a company that has annual sales of $1,000,000?
The materiality concept states that a company must perform strictly proper accounting only for
4. What is the goal of conservatism?
5. Discuss some measures that should be taken to maintain control over merchandise inventory.
Maintaining goods controls over merchandise inventory is very important for a merchandiser. Good
6. Under a perpetual inventory system, what are the four inventory costing methods and how does each
method determine ending merchandise inventory and cost of goods sold?
The four inventory costing methods are specific identification, FIFO (First-In, First-Out), LIFO
(Last-In, First-Out), and weighted-average. The specific identification method uses the specific cost
of each unit of inventory to determine cost of goods sold and ending merchandise inventory. The
7. When using a perpetual inventory system and the weighted-average inventory costing method, when
does the business compute a new weighted-average cost per unit?
8. During periods of rising costs, which inventory costing method produces the highest gross profit?
During periods of rising costs, the FIFO inventory costing method produces the highest gross profit.
9. What does the lower-of-cost-or-market (LCM) rule require?
10. What account is debited when recording the adjusting entry to write down merchandise inventory
under the LCM rule?
11. What is the effect on cost of goods sold, gross profit, and net income if ending merchandise
inventory is understated?
12. When does an inventory error cancel out, and why?
One period’s ending merchandise inventory becomes the next period’s beginning merchandise
13. How is inventory turnover calculated, and what does it measure?
Inventory turnover measures how rapidly merchandise inventory is sold during a period (the number
14. How is days’ sales in inventory calculated, and what does it measure?
A. When using the periodic inventory system, which inventory costing method(s) always produces
the same result as when using the perpetual inventory system?
When using a periodic inventory system, the specific identification and FIFO inventory costing
methods produce the same results as when using a perpetual inventory system.
A. When using the periodic inventory system and weighted-average inventory costing method,
when is the weighted-average cost per unit computed?
When using the periodic inventory system and weighted-average inventory costing method, the
weighted average cost per unit is computed at the end of the period (a single weighted average
cost per unit is computed for the entire period).
Short Exercises
S6-1 Determining inventory accounting principles
Learning Objective 1
Ward Hardware used the FIFO inventory costing method in 2018. Ward plans to continue using the
FIFO method in future years. Which accounting principle is most relevant to Ward’s decision?
SOLUTION
S6-2 Determining inventory costing methods
Learning Objective 2
Ward Hardware does not expect costs to change dramatically and wants to use an inventory costing
method that averages cost changes.
Requirements
1. Which inventory costing method would best meet Ward’s goal?
2. Assume Ward wanted to expense out the newer purchases of goods instead. Which inventory costing
method would best meet that need?
SOLUTION
Requirement 1
Use the following information to answer Short Exercises S6-3 through S6-6.
Boston Cycles started October with 12 bicycles that cost $42 each. On October 16, Boston bought 40 bicycles at
$68 each. On October 31, Boston sold 34 bicycles for $100 each.
S6-3 Preparing a perpetual inventory record and journal entries—Specific identification
Learning Objective 2
Requirements
1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses the specific identification inventory costing method. Assume that
Boston sold 10 bicycles that cost $42 each and 24 bicycles that cost $68 each.
2. Journalize the October 16 purchase of merchandise inventory on account and the October 31 sale of merchandise inventory on account.
SOLUTION
Requirement 1
Perpetual Inventory Record: Specific Identification
S6-3, cont.
Requirement 2
S6-4 Preparing a perpetual inventory record and journal entries—FIFO
Learning Objective 2
Requirements
1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses the FIFO inventory costing method.
2. Journalize the October 16 purchase of merchandise inventory on account and the October 31 sale of merchandise inventory on account.
SOLUTION
Requirement 1
S6-4, cont.
Requirement 2
S6-5 Preparing a perpetual inventory record and journal entries—LIFO
Learning Objective 2
Requirements
1. Prepare Boston Cycle’s perpetual inventory record assuming the company uses the LIFO inventory costing method.
2. Journalize the October 16 purchase of merchandise inventory on account and the October 31 sale of merchandise inventory on account.
SOLUTION
Requirement 1
S6-5, cont.
Requirement 2