1. What are the three different inventory cost flow
assumptions commonly used in commerce today and allowed by generally accepted
accounting principles? Pick one and describe in detail how it works. How does
your company, or a company you are familiar with, determine what cost flow
assumption it should use?
2. How do the three inventory
cost flow assumptions compare when reporting profit in the income statement and
inventory on the balance sheet in a period of rising prices?
3. Companies will normally
pick an inventory cost flow assumption based on the balance sheet effects, the
income statement effects or the tax effects. What are some of the
considerations to think about if management is focused on the income statement
effects? Which method would provide the most favorable income statement?
4. Describe the lower of cost or market inventory valuation method and why it is used. How
does this follow the convention in conservatism in accounting?
5. What are some of the pros and cons of having a high inventory turnover vs low inventory turnover? Do you
think it depends on the type of business? Which types of businesses would have
low inventory turnover rates and still be considered acceptable? How would you
determine the appropriate inventory ratio if you owned a merchandising company?
6. In your own words describe the inventory turnover ratio and days in inventory calculation.
Why are these calculations important to merchandising companies?
7. Learning about the various financial statement ratios can seem overwhelming. The good
news is, you do not need to memorize the ratios. Starting on page 712 of the
eBook is a discussion of the most common financial statement ratios and how to
calculate them. If you were a manager, which ratio do you think would be most