answer cuestione 1234 found on page 349 ir the ACCOUNTING te

answer cuestione 1,2,3,4, found on page 349 ir the ACCOUNTING textbook

I. Before inventory purchases are recorded, the receiving report should be reconciled to what documents? 2. Why is it important to periodically take a physical inventory when using a perpetual inventory system? 3. Do the terms FIFO, LIFO and weighted average refer to techniques used in determining quantities of the various classes of merchandise on hand? Explain. 4. If merchandise inventory is being valued at cost and the price level is decreasing, which of the three methods of costing-FIFO, LIFO, or weighted average cost, (b) the lowest inventory cost, (c) the highest gross profit, and (d) the

Solution

1. The receiving report should be reconciled with Purchase Orders and Invoices in order to verify the inventory costs. Quantity can be checked as per the actual units received. Also, this reconciliation acts as a proof at the time of Auditing of financial statements.

2. Physical inventory to be taken periodically when using a perpetual inventory system due to the following reasons:

- Reconciliation of the actual stock units sitting in warehouse.

- Check for any shortage

- Check for any damaged units

3. FIFO, LIFO and Weighted average methods are the basic approaches/techniques for the valuation of inventory and not the quantity of various classes of merchandise on hand. The firm can choose any of the cost methods.

4. If the merchandise inventory is valued at cost and price level is decreasing, the following will give:

(b) The lowest inventory cost - FIFO method will give the lowest inventory cost. This is because the inventory which was puchased at the beginning of the year at higher price was taken off the Balance Sheet due to First-In-First-Out method. So, the inventory purchased at the end will be the closing stock and was purchased at lower price (price level is decreasing)

(c) Highest Gross profit - LIFO method will give the highest gross profit. This is due to the two reasons. Firstly, LIFO method will calculate lower Cost of Goods sold as the inventory puchased at last (at lower price) is sold first. So, this will increase the progit margin.

Secondly, LIFO method will give the highest inventory cost. This is because the inventory which was puchased at the end of the year at lower price was taken off the Balance Sheet due to Last-In-First-Out method. So, the inventory purchased at the beginning will be the closing stock and was purchased at higher price (price level is decreasing).

For question 4. part (a) and part (d) as not visible in the image.