ACCT 2301 - Unit 2

The definition of inventory includes which of the following items?

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

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

LIFO

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

LIFO

When prices increase, the _____ inventory method provides the best matching of revenue and expenses.

LIFO

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

LIFO reserve

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

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

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

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

Work in process

A trade discount is

a percentage reduction from list price

An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)

account receivable

A ___ ___ is the legal right to receive cash from a credit sale and represents an asset of the company.

accounts receivable

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ___ method of accounts receivable.

aging

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

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

Inventory

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

Receivables not expected to be collected should

not be counted in assets of the company

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable

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

outdated

Accounting errors must be corrected

as soon as they are discovered

Accounts receivable should be classified as a(n)

asset

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

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) ___ ___ approach to measuring bad debts.

income statement

The direct write-off method is required for

income tax purposes

Purchasing inventory on account:

increases liabilities increases assets

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

incurred several years earlier

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 ______ method of valuing inventory was developed to avoid reporting inventory at an amount that is ______ than the benefits it can provide.

lower of cost and net realizable value; greater

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

2

Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error

Immediately

When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?

An entry to reinstate the account receivable and an entry to record payment.

Where is inventory reported in the financial statements?

Balance sheet as a current asset

A multiple-step income statement reports multiple levels of

Income

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

Cost of Goods Sold Inventory

Inventory is classified as

Current asset

Josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?

Debit Cost of Goods Sold $1,500; credit Inventory $1,500

Clark uses the perpetual inventory system. Clark sells goods to a customer on account for $1,000. The cost of the goods sold was $700. Which of the following entries are required?

Debit Cost of Goods Sold $700; credit Inventory $700 Debit Accounts Receivable $1,000; credit Sales Revenue $1,000

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

Debit Inventory

Joyce Corp. uses the percentage-of-receivables method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?

Debit to Allowance for Uncollectible Accounts Credit to Accounts Receivable

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

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 methods are available for costing inventory?

FIFO Specific identification Weighted-average LIFO

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

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

FIFO

Most closely approximates the actual physical flow of inventory

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

NIFO Simple-average

Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs?

Perpetual inventory system

LIFO

Provides better matching of current revenues with current inventory cost

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

Raw materials Finished goods Work in process

The cost of estimated accounts receivable that will not be collected is referred to as ___ ___ expense.

bad debt

A trade discount is a reduction from the list price, which is used to:

change prices without publishing a new catalog give quantity discounts to customers disguise real prices from competitors

Allowance for Uncollectible Accounts has a credit balance because it is a(n) _____ account.

contra-asset

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period

The journal entry to record bad debt expense includes:

debit to bad debt expense credit to allowance for uncollectible accounts

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

decrease an asset and increase an expense increase an asset and increase revenue

The shipping term FOB stands for

free on board

When the allowance method is used, the write-off of an uncollectible account:

has no effect on net income

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

included in Gerald's inventory

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 in the following year will be:

overstated net income

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

paid by the supplier

Two entries are required when a previously written off account is collected. These two entries include:

record the collection on the account receivable reinstate the account receivable

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO

reserve

Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?

sales discount

Sales to customers in which the customers pay within 30 to 60 days are referred to as

sales on account. credit sales.

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n)

sales return

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 increases

FOB destination means title to the goods passes

when they arrive at the destination