CH6 Learnsmart

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

Debit Inventory

Which of the following inventory systems requires a physical count in order to determine cost of goods sold?

Periodic inventory system

Purchase returns are recorded in a separate contra purchase account in a ___ inventory system.

periodic

A ___ inventory system updates the inventory account each time a sale or purchase is made, whereas a ___ inventory system calculates cost of goods sold and ending inventory at the end of the reporting period.

perpetual periodic

Freight-in costs should be debited to the Inventory account under the ___ inventory system and to a separate Freight-in account under the ___ inventory system.

perpetual periodic

The shipping term FOB stands for

free on board.

Net sales revenue minus cost of goods sold is

gross profit.

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

assets will increase.

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

inventory

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.)

inventory. cost of goods sold.

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 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.

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

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

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

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

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

Which inventory cost flow method approximates the physical flow of inventory items?

FIFO

The ___ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

FIFO or first-in-first-out

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

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

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

LIFO reserve

Match each inventory system with the method for recognizing freight-in on purchases.

Periodic inventory <-> A separate freight-in account is used. Perpetual inventory <-> Freight is added directly to the inventory account.

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

Perpetual inventory system

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.

If a company uses the perpetual inventory system, how many entries are made when a sale occurs?

Two

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

Two

Inventory is classified as

a current asset.

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.

Accounting errors must be corrected

as soon as they are discovered.

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

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

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, greater, more, or larger

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

immediately.

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

lower, smaller, or less

Companies that produce the inventory they sell are referred to as

manufacturers

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

outdated, spoiled, obsolete, old, expired, or aged

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

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the ___ method.

specific identification

Green Corp. uses a periodic inventory system. Cost of beginning inventory is $1,000. During the year, Green purchases inventory costing $11,000. The related freight is $100. Based on a physical count, Green determines that inventory costing $1,800 is still on hand. Green Corporation's cost of goods available for sale is:

$12,100 $(1,000 +11,000 +100) = $12,100

Bijoux Company has sales of $40,000, beginning inventory of $5,000, purchases of $25,000, and ending inventory of $7,000. The cost of goods available for sale is:

$30,000 $5,000+$25,000=$30,000

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

perpetual only

FOB shipping point means title to the goods passes

when they are shipped.

The specific identification method (select all that apply):

would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost

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

Manufacturers

The definition of inventory includes which of the following items?

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

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

FIFO

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

paid by the supplier.