BUS3061 u05a1 Troy Wilson Ratio Analysis Question 1: Proficient: Explain why proper inventory valuation

| November 9, 2018

BUS3061 u05a1
Troy Wilson
Ratio Analysis

Question 1:
Explain why proper inventory valuation is so important to the
calculation of a company’s “bottom line” net income.

What is the meaning of taking a physical inventory and why is it
important to take a physical inventory when using a perpetual inventory system.

Explain the accountant’s role regarding taking a physical

Question 2:
What is the cost flow assumption?

What is meant by the physical flow of goods?

What relationship exists between cost flows and the physical
flow of goods in a company?

To place the proper valuation on inventory, a business must
determine which costs should be included in inventory cost. Getting goods ready
to sell should include what items?

Question 3:
Identify and describe each of the four most commonly used
inventory valuation methods. What are the main advantages of each method?

Identify the main disadvantages of each inventory valuation

Question 4:
If inventory is being valued at cost and the price level is
steadily rising, which of the following three methods of costing—FIFO, LIFO, or
weighted average cost—will yield the lowest annual after tax net income?

Which method will yield the highest after tax net income in a
scenario where the price level is steadily declining?

Which of the three methods of inventory will in general yield an
inventory cost most nearly approximating current replacement cost?

Question 5:
Some circumstances justify departures from the historical cost
approaches of FIFO, LIFO, and weighted average cost. Several additional
inventory methods may be used when circumstances warrant. Identify and describe
each of these alternative methods. Include an example of when each method may
be applied.

Identify which methods could be used to determine whether there
has been shrinkage or shortage in the physical inventory.

Question 6:
Identify and describe the ratio that can be used to analyze a
company’s inventory.

What does the ratio measure?

What are the components of the ratio?

How is the ratio computed?

How does a company know if the results of the calculation are
helping or hurting the company’s financial health?

Given the following information, calculate the inventory
turnover for Lincoln Company, a large grocery store chain. Evaluate the trend
2014: Cost of goods sold—$1,043,000; Beginning
inventory—$283,000; Ending inventory—$264,000.
2013: Cost of goods sold—$820,000; Beginning inventory—$311,000;
Ending inventory—$283,000.

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