Accounting Chapter 6 Smartbook

Calculate Cost of Goods Sold OR Ending Inventory using *Inventory Equation

*Beginning Inventory + Purchases = Ending Inventory + Cost of Goods Sold

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

Debit Inventory

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold? Multiple choice question.

FIFO

For internal record keeping, most companies carry their inventory using the _____ basis.

FIFO

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

Which of the following accounts are typically reported in the balance sheet of a manufacturing company?

Finished goods Work in process Raw materials

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Inventory Cost of Goods Sold

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

Which cost flow assumption generally results in the highest reported amount of net income in periods of rising inventory costs?

LIFO

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the

LIFO reserve

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the

LIFO reserve

Neumann Company can determine the cost of inventory still on hand by referring to the inventory account. Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

Perpetual inventory system

Which of the following methods are available for costing inventory?

Specific identification LIFO Weighted-average FIFO

Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be

a separate freight-in account.

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

The shipping term FOB stands for

free on board.

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory

Purchasing inventory on account:

increases assets increases liabilities

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

incurred several years earlier.

A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:

inventory

Items held for sale in the normal course of business are referred to as

inventory

When a sale occurs under the periodic inventory system, we record:

only the sale, but not the related cost of goods sold

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming

outdated

Kilian Company's inventory balance at the end of the current year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements

overstated net income

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a periodic ________ inventory system.

perpetual

Freight-in costs are debited to Inventory in this inventory system:

perpetual period

A multiple-step income statement reports multiple levels of

profitability

periodic

purchases

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

FOB shipping point means title to the goods passes

when they are shipped.

Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

Periodic inventory system

Which of the following methods are not used for inventory costing?

Simple-average NIFO

Which of the following accounts would be found in the balance sheet of a manufacturing company?

Work in process

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

inventory. cost of goods sold.

Companies that produce the inventory they sell are referred to as

manufacturers

What type of company purchases raw materials and makes goods to sell?

manufacturers

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)

total assets increase net income increases stockholders' equity increase

Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the financial statement effect in the current year will be:

understated assets, retained earnings, and net income

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are

paid by the supplier.

Which of the following represent reasons why managers closely monitor inventory levels?

To minimize costs of inventory write-downs due to obsolete inventory. To ensure that sufficient units are available.

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

In a periodic inventory system, purchase returns

are recorded in a separate contra purchases account.

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

assets increase by the sales price of the inventory assets decrease by the cost of the inventory

Meller purchases inventory on account. As a results, Meller's

assets will increase.

perpetual

inventory

In a perpetual inventory system, when inventory is purchased, the asset _________ account is debited, whereas in a periodic system, the _______ account is debited.

inventory purchases

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be ______ than ending inventory determined using the FIFO inventory assumption.

lower

The definition of inventory includes which of the following items? Multiple select question.

Materials used currently in the production of goods to be sold Items held for resale Items currently in production for future sale

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be ______ than cost of goods sold determined using the FIFO inventory assumption.

higher

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

multiple-step

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

two

FOB destination means title to the goods passes

when they arrive at the destination.