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Chapter 7 notes

by: Nicole Salem

Chapter 7 notes Acct 20353

Nicole Salem

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This are the weekly noted for Chapter 7 in Fundamentals of Accounting I
Fundamentals Of Accounting I
Cynthia Hanes
Class Notes
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This 2 page Class Notes was uploaded by Nicole Salem on Sunday February 21, 2016. The Class Notes belongs to Acct 20353 at Texas Christian University taught by Cynthia Hanes in Spring 2016. Since its upload, it has received 11 views. For similar materials see Fundamentals Of Accounting I in Accounting at Texas Christian University.


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Date Created: 02/21/16
Acct 20353 Questions for Chapter 7 To be discussed in class  1. What are the different types of inventory? The different types of inventory are:  Raw materials inventory: items acquired for processing into finished goods  Merchandise inventory: goods held for sale in the normal course of business  Work in process inventory: goods in the process of being manufactured but not yet  complete  Finished goods inventory: manufactured goods that are complete and ready for sale 2. What is the relationship between inventory and cost of goods sold? The relationship can be shown through the equation: Cost of goods sold= beginning inventory + purchases of merchandise during the year – ending  inventory 3. What are the four inventory costing methods? I. Specific Identification Method: this method identifies the cost of the specific item that  was sold II. LIFO ( Last­ in , first­out) method: assumes that the most recent purchased unit are the  ones that are sold first III. FIFO (first­ in, first­out) method: assumes that the first goods purchased are the first  goods sold IV. Average cost method: uses the weighted average unit cost of the goods available for sale  for cost of goods sold and ending inventory 4. When prices are rising, which inventory method yields the highest cost of goods  sold/lowest net income? When prices are rising, the LIFO or last­in, first­out method is the one that lower net income.  5. What is the lower of cost or market (LCM) rule? Lower of cost or market is a valuation method departing from the cost principal. The LCM rule  serves to recognize a loss when replacement cost or net realizable value drops below cost.  6. How do changes in inventory affect cash flow from operations? If there is an increase in net inventory: you purchased more and that increase must be  subtracted from the amount of cash flow from operations.  If there is a decrease in net inventory: you sold instead of purchasing, and this decrease in inventory must be added to the amount of cash flow from operations.  7. What are the effects of errors in ending inventory? If the error causes the cost of goods sold to be overstated, then the income before taxes  would also be understated for the next year, and the inventory would be greater. If the error causes the cost of goods sold to be understated, then the income before taxes  would be overstated in the next year and the inventory would be less. 


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