Accounting Chapter 5

Number of days in the period / inventory turnover

A ratio based on inventory turnover is the number of days' sales in inventory. What is the calculation for the number of days' sales in inventory?

$150,000

ABC Co. had $200,000 in net income for the year. Inventory increased by $50,000. ABC purchases Inventory with cash and there are no other current assets or liabilities on the balance sheet.

ABC's ratio is not as good as the ratio of its competitors, ABC should investigate ways to increase its ratio.

ABC Co. has an inventory turnover ratio of 8. Industry and competitor standards have an inventory turnover ratio of 10. How does ABC compare to its competitors? What would be the course of action that management should take?

Net income is understated in the following year.

An inventory error is made and as a result, net income is overstated in the current year. What effect does this have on net income in the following year?

Cost of goods sold will be understated by $75,000.

Atlas Company has $900,000 for cost of goods available for sale. The accountant caught an error for the amount assigned to inventory in the current year. The correct amount of inventory should have been $400,000 but the account was reported as $475,000. If the error is not corrected, what affect will this have on current year cost of goods sold?

$65,000

Cisko Company had the following information available at year-end: Cash$100,000Accounts Receivable$45,000Raw Materials$15,000Work-in process$20,000Finished goods$30,000Equipment$50,000 What is amount of total inventory to be reported on Cisko's year-end balance sheet?

$90,000

Civik Co. valued its inventory using LIFO at $100,000. The replacement cost of this inventory was valued at $90,000. At what amount should Civik value inventory?

$230

Dawson uses a periodic inventory system. At the end of April, Dawson had 20 units on hand. April 1On hand, 10 units @ $2 each$2019Purchased 90 units @ $3 each270Goods available for sale$290 If Dawson, Inc. uses FIFO inventory costing, how much is cost of goods sold for April?

LIFO-FIFO

Federal income tax rules allow businesses to use different inventory costing methods for tax reporting and financial reporting with one exception. Which of the following situations is not allowed by federal income tax rules? Inventory Method forInventory Method for Tax ReportingFinancial Reporting

FIFO

For which inventory method does the dollar amount of inventory on hand at the end of the period not differ regardless of whether a company uses a periodic or a perpetual inventory system?

Automobiles at a car dealer

For which of the following products is a company most likely to use the specific identification method?

The amount is added to net income in the operating activities section.

How is a decrease in inventory shown on a statement of cash flows prepared using the indirect method?

Net sales less cost of goods sold

How is gross profit computed?

Beginning inventory plus purchases

How is the cost of goods available for sale computed?

Gross profit divided by net sales

How is the gross profit ratio computed?

Beginning inventory is understated by $20,000

In the previous year, ending inventory is miscounted and understated by $20,000. Assume the current year inventory is counted correctly. What effect does this error have on the current year?

$40,000

Inventory, January 1$20,000Inventory, December 3130,000Inventory purchases50,000 Compute cost of goods sold.

$70,000

Jacob Co. had the following information available at year-end: Beginning Inventory, Jan. 1$20,000Purchases$50,000Ending Inventory, Dec. 31$9,000 In the calculation of Cost of goods sold in a periodic inventory system, what is the amount of cost of goods available for sale?

Moving average is an average cost method used with a perpetual inventory system.

Select the definition for the term 'moving average' with regard to inventory costing.

Conservatism

The use of the lower-of-cost-or-market rule to value inventory is justified on the basis of what principle?

$186.84

Tracks Bikes uses the perpetual moving-average inventory method to account for inventory costs. On August 1, the company's records showed beginning Inventory of 100 bikes on hand with a total cost of $18,000. On August 5, 52 additional bikes were purchased at $200 each. What is the average cost per unit after the August 5 purchase?

Profit is understated

What is the effect of understating ending inventory when the company uses a periodic inventory system

There is no effect on profit

What is the effect on current period profit when beginning and ending inventory are understated by $5,000 when the company uses a periodic inventory system?

Inventory, an asset, is decreased; Loss on Decline in Value of Inventory, an expense, is increased

What is the impact on the financial statements with the write down of inventory to its market value?

Debit Cost of goods sold; Credit Inventory

What is the journal entry to record cost of goods sold under a perpetual inventory system?

FIFO

Which inventory method assigns the most recent costs to ending inventory?

FIFO (rising cost)

Which type of inventory costing system is going to have a higher ending inventory when costs are rising?

Finished goods

Which type of inventory of a manufacturer is similar to merchandise inventory of a retailer?

A perpetual system

Which type of inventory system updates the Inventory account at the time of each sale?

Because the amount assigned to inventory will affect the amount eventually recorded as cost of goods sold.

Why is it important that the proper amount be assigned to inventory?

60%

XYZ Co. had the following amounts available at year-end:Net sales$1,000,000Cost of goods sold$400,000Net income$150,000What is the gross profit ratio for XYZ?

Direct materials, work in process, and finished goods

The inventory of a retailer is limited to a single type of inventory. What are the types of inventory of a manufacturer?

Operating activities

The purchase of inventory is shown in which section of the statement of cash flows?

30 days

A company began the year with $50,000 in inventory and ended the year with $70,000 in inventory. Cost of goods sold for the year amounted to $720,000. Assuming 360 days in a year, how long, on average, does it take the company to sell its inventory?

Cost of goods sold is overstated for the current year and understated for the following year.

A company erroneously omits one section of its warehouse in the year-end inventory. Assume the correction is made in the following year. What is the effect of the inventory error?

$500

A company that uses LIFO had the following inventory information available: Beginning inventory100 units @ $20 = $2,000Purchases50 units @ $30 = $1,500Cost of goods sold in units75 units What amount of cost of goods sold represents LIFO liquidation?

The amount owed to suppliers increased.

A company's change in accounts payable was added back to net income on the statement of cash flows prepared using the indirect method. What does this indicate about the amount owed to suppliers?

$140,000

Given the following account balances, determine net sales: Sales150,000Cost of Goods Sold30,000Net income50,000Sales Returns & Allowances10,000

Cost

The LCM rule is an exception to which accounting principle?

The gross profit ratio is the percent of sales available to cover operating costs and profit.

What is does the gross profit ratio or gross margin tell you about a company's ability to earn a profit?

A refund to a customer for spoiled or damaged merchandise as an alternative to returning the merchandise

What is meant by the term 'Sales allowance'?

LIFO

Which inventory method results in the least amount of income before taxes, assuming a period of rising prices?

General Motors

Which of the following companies would have direct materials as a component of inventory?

A LIFO inventory liquidation occurs when a company that uses the LIFO inventory method sells more merchandise during the accounting period than it has purchased.

Which of the following occurrences causes a LIFO inventory liquidation?

Inventory turnover ratio

Which ratio measures the relationship between sales and inventory and provides a measure of how long it takes to sell inventory?

Under a perpetual inventory system, ending inventory is counted at the end of the period and the amount is deducted from Cost of goods available for sale to determine Cost of goods sold.

Which statement is not true of a perpetual inventory system?