21. Explain the meaning of "cost" and "market" as used in the application of the lower-of-cost-or-market rule.
22. What accounting steps would a firm normally take when it discovers a material difference between a physical inventory count and the book inventory figure? Assume that the company uses a perpetual inventory system.
23. Explain the effects of an understatement of ending inventory on both the present year's net income and the following year's net income. What is the effect of this error on the inventory balance at the end of the following year?
24. What are the circumstances that might cause a company to need an estimate of the amount of its inventory?
25. List the specific steps used in computing the estimated inventory balance using the gross margin method.
26. Explain the computation of and the significance of inventory turnover.
27. Discuss the significance of the average number of days to sell inventory.
28. What ratio (usually an average from prior periods) can be used in estimating the current period's ending inventory?
Multiple Choice Questions
29. At a time of declining prices, which cost flow assumption will result in the highest ending inventory?
A. Weighted average
B. FIFO
C. LIFO
D. Eitherweighted average or FIFO
30. When prices are rising, which method of inventory, if any, will result in the lowest relative net cash outflow (including the effects of taxes, if any)?
A. LIFO.
B. FIFO.
C. Weighted average
D. None of these; inventory methods cannot affect cash flows.