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Kaitlyn Maki

Professor Gina Heaney

Accounting 102

June 10, 2020

Chapter 6: Merchandise Inventory

1. The consistency principle states that a business should use the same accounting methods and

procedures from period to period.

2. The disclosure principle requires a business to report enough information in their financial

statements for an outsider to make knowledgeable decisions about the company.

3. The materiality concept states that a company must perform strictly proper accounting only

for items that are significant to the business’s financial statement. The materiality concept

frees accountants from having to report every last item in strict accordance with GAAP.

Therefore, the dollar amount that is material for a company that has annual sales of $10,000

isn't material for a company that has annual sales of $1,000,000.

4. The goal of conservatism is to report realistic figures and never overstate assets or net

income.

5. Companies must take certain measures in order to maintain good control over merchandise

inventory, such as ensuring that merchandise inventory is not purchased without proper

authorization, making sure that damaged inventory is properly recorded and either used,

disposed of, or returned to the vendor, and a physical count of inventory should be completed

at least once a year to track inventory shrinkage due to theft, damage, and errors.

6. There are four inventory costing methods under a perpetual inventory system. The specific

identification method uses the specific cost of each unit of inventory to determine the ending
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inventory and cost of goods sold. Under the first-in, first-out (FIFO) method, the cost of

goods sold is based on the oldest purchases, meaning that the oldest inventory gets sold first.

Under the last-in, last-out (LIFO) method, ending inventory comes from the oldest costs and

the cost of goods sold is based on the most recent purchases. Under the weighted-average

method, the business computes a new weighted-average cost per unit after each purchase by

dividing the cost of goods available for sale by the number of units available.

7. Using a perpetual inventory system and the weighted-average inventory costing method, the

business computes a new weighted-average cost per unit after each purchase.

8. During periods or rising costs, the first-in, first-out inventory costing method produces the

highest gross profit.

9. The lower-of-cost-or-market (LCM) rule requires merchandise inventory to be reported in

the financial statements at whichever is lower-its historical cost or its market value.

10. The cost of goods sold account gets debited when recording the adjusting entry to write down

merchandise inventory under the LCM rule.