Chapter 6 accounting
When inventory is sold, the cost of inventory is recognized as a(n)
expense
What is freight-in?
Freight-in is added to the cost of inventory
Which of the following items are readily available from an inventory account under the perpetual inventory system? cost of units sold freight-out ending inventory balance beginning inventory balance individual purchases sales revenue
cost of units sold ending inventory balance beginning inventory balance individual purchases
Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming ....
outdated
Where is inventory reported in the financial statements? Statement of cash flows as an investing activity Balance sheet as a current asset Income statement as revenue Balance sheet as a noncurrent asset
Balance sheet as a current asset
Inventory is classified as a revenue. a noncurrent asset. a current asset. a current liability.
a current asset
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to: increase an asset and decrease an expense increase an asset and increase revenue decrease an asset and decrease revenue decrease an asset and increase an expense
increase an asset and increase revenue decrease an asset and increase an expense
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: revenue inventory gains and losses operating expenses
inventory
True or false: The inventory cost flow assumption must match the physical flow of inventory units.
False Reason: For most companies, the physical flow resembles FIFO; however, LIFO and weighted-average may be utilized.
Inventory not yet sold is classified as a(n) (blank) in the (blank) (blank)
asset Balance sheet
Gross profit divided by net sales equals gross profit ratio. net income. average days in inventory. inventory turnover.
gross profit ratio.
Under the (blank) inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.
perpetual
If a company uses a perpetual inventory system, the entry to record the company's return of goods previously purchased on account includes ______ and ______. (Answer from the viewpoint of the buyer.) credit to Inventory. credit to Cash debit to Accounts Payable debit to Purchase Returns credit to Accounts Receivable
credit to inventory debit to accounts payable
Using the perpetual inventory system, what is the effect of a sale of inventory on assets? Multiple select question. assets decrease by the sales price of the inventory assets increase by the sales price of the inventory assets increase by the cost of the inventory assets decrease by the cost of the inventory
assets increase by the sales price of the inventory assets decrease by the cost of the inventory
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to: Multiple select question. decrease an asset and decrease revenue increase an asset and decrease an expense increase an asset and increase revenue decrease an asset and increase an expense
increase an asset and increase revenue decrease an asset and increase an expense
Purchasing inventory on account: Multiple select question. increases liabilities decreases equity decreases assets increases equity increases assets
increases liabilities Increases assets
Cellem, Inc.'s beginning inventory is $4,000 and its ending inventory is $2,000. The inventory turnover is 6. Cost of goods sold must equal: $18,000 $24,000 $36,000 $12,000
$18,000
Periodic inventory system
Shelly company must first take a physical inventory to determine the cost of inventory still on hand
For internal record keeping, most companies carry their inventory using the Blank______ basis.
FIFO
Periodic inventory system
Shermman company recognizes cost of goods sold after completing a physical inventory
What is freight-out?
Freight-out is recognized as operating expense
The gross profit ratio is calculated as gross profit divided by net sales. net sales divided by cost of goods sold. cost of goods sold divided by ending inventory. gross profit divided by cost of goods sold.
Gross profit divided by net sales
Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are treated as a selling expense. included in Gerald's inventory. paid by the supplier.
Included in Geralds inventory
Average days in inventory measures average time from the sale of inventory to the collection from customers. the approximate number of days the average inventory is held. average gross profit for the year. how many times the average inventory was sold per year.
the approximate number of days the average inventory is held.
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income? Multiple choice question. LIFO FIFO Weighted-average
LIFO
Perpetual inventory system
Neumann company can determine the cost of inventory still on hand by referring to the inventory account
A multiple-step income statement reports multiple levels of
income
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.
multi-step
Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption? Multiple choice question. Weighted-average LIFO FIFO
FIFO
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory? FIFO Weighted-average LIFO
LIFO
The definition of inventory includes which of the following items? Materials used currently in the production of goods to be sold Items held for use or disposal Items currently in production for future sale Items held for resale
Materials used currently in the production of goods to be sold Items currently in production for future sale Items held for resale
To calculate the amount in the inventory account, which of the following occurs? Selling expense is added to the cost of inventory Purchase returns are subtracted from the cost of inventory Freight-in is deducted from the cost of inventory Freight-in is added to the cost of inventory Purchase discounts are added to the cost of inventory Purchase discounts are subtracted from the cost of inventory Purchase returns are added to the cost of inventory
Purchase returns are subtracted from the cost of inventory Freight-in is added tot the cost of inventory Purchase discounts are subtracted from the cost of inventory
Freight charges are ____ to the cost of inventory, while purchase returns and purchase discounts are ___ from the cost of inventory by most companies.
added deducted
The ratio that indicates the approximate number of days the average inventory is held is referred to as the: weighted-average inventory average days in inventory average inventory sales
average days in inventory
Under a perpetual inventory system, the entry to record the return of goods previously purchased on the account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is: incorrect and will cause liabilities to be overstated incorrect and will cause assets to be overstated incorrect and will cause assets to be understated correct
correct
The definition of inventory includes which of the following items? Items currently in production for future sale Items held for resale Materials used currently in the production of goods to be sold Items held for use or disposal
items held for resale Items currently in production for future sale Materials used currently in the production of goods to be sold
What most closely approximates the actual physical flow of inventory?
FIFO
Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs? Periodic inventory system Perpetual inventory system Both periodic and perpetual inventory systems
Perpetual inventory system
Perpetual inventory system
Peter company recognizes cost of goods sold each time it recognizes a sale
Where is inventory reported in the financial statements? Multiple choice question. Balance sheet as a noncurrent asset Balance sheet as a current asset Statement of cash flows as an investing activity Income statement as revenue
Balance sheet as a current asset
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? Multiple select question. Debit Cost of Goods Sold $1,000; credit Inventory $1,000 Debit Cost of Goods Sold $700; credit Net Income $300; credit Service Revenues $1,000 Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 Debit Cost of Goods Sold $700; credit Inventory $700
Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 Debit Cost of Goods Sold $700; credit Inventory $700
Which of the following is a correct interpretation of the information provided by the gross profit ratio? It measures the amount by which the inventory sale exceeds its cost. It measures the percentage of each sales dollar available as income. It measures the amount by which sales exceed operating expenses.
It measures the amount by which the inventory sale exceeds its cost.
What provides better matching of current reveenues with current inventory cost?
LIFO
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. To increase the average days in inventory.
To minimize costs of inventory write-downs due to obsolete inventory. To ensure that sufficient units are available.
A periodic inventory system measures cost of goods sold by: Multiple choice question. debiting cost of goods sold for all purchases of inventory. making entries to the inventory account for each purchase and sale. estimating the amount of inventory sold. counting inventory at the end of the period.
counting inventory at the end of the period.
The shipping term FOB stands for freight over board. freight on board. free on board. free onto buyer.
free on board
Steiner Company's average days in inventory has decreased during the current year as compared to the prior year. From this information, we can conclude that Steiner has a higher inventory turnover ratio. is selling its inventory slower. is selling its inventory faster. has a lower inventory turnover ratio.
has a higher inventory turnover ratio. is selling its inventory faster.
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: operating expenses inventory gains and losses revenue
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: Multiple choice question. Raw Materials Purchases Inventory Cost of Goods Sold
inventory
Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are: treated as a selling expense. paid by the supplier. deducted from Ronald's inventory.
paid by the supplier
Weighted-average unit cost is determined by dividing cost of goods available for sale by Multiple choice question. quantity in beginning inventory. quantity most recently purchased. quantity in ending inventory. total quantity available for sale.
total quantity available for sale
FOB destination means title to the goods passes when they arrive at the destination. when they are shipped to the customer.
when they arrive at the destination
Select all that apply Which of these would explain an increase in a company's inventory turnover ratio? A decrease in inventory. A decrease in cost of goods sold. An increase in the demand for the company's products.
A decrease in inventory. An increase in the demand for the company's products.
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? Multiple choice question. Debit Cost of Goods Sold $1,500; credit Sales Revenue $1,500 Debit Inventory $1,500; credit Cost of Goods Sold $1,500 Debit Accounts Receivable $2,000; credit Inventory $2,000 Debit Cost of Goods Sold $1,500; credit Inventory $1,500
Debit costs of goods sold 1,500; credit inventory 1,500
Which of the following is a correct interpretation of the information provided by the gross profit ratio? It measures the percentage of each sales dollar available to cover nonoperating expenses. It measures the amount by which the sale of inventory exceeds its cost per dollar of sales. It measures the percentage of each sales dollar available as income.
It measures the amount by which the sale of inventory exceeds its cost per dollar of sales.
When prices increase, the inventory method ___ provides the best matching of revenue and expenses.
LIFO
When prices increase, the _____ inventory method provides the best matching of revenue and expenses.
LIFO
In a perpetual inventory system, when a company sells inventory on account, how many entries are required? Multiple choice question. Two Three Zero one
Two One entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory.
Freight-in is recorded as part of ______, whereas freight out is often recorded as ______. miscellaneous expenses; selling expense selling expense; cost of goods sold inventory; selling expense
inventory; selling expense
Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.) Multiple select question. current assets. inventory. cost of goods sold. liabilities.
inventory cost of goods
FOB shipping point means title to the goods passes: when they arrive at the destination. when they are shipped.
when they are shipped
Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals _____ times. 5 10 15
10 Reason: Inventory turnover ratio=cost of goods sold/average inventory or $10,000/ (($800 + $1,200)/2).
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) Multiple select question. net income increases total assets increase stockholders' equity increases total assets decrease stockholders' equity decreases
net income increases total assets increases stockholders equity increases
Meller purchases inventory on account. As a results, Meller's Multiple choice question. stockholders' equity will decrease. assets will increase. income will decrease. liabilities will decrease.
assets will increase
A periodic inventory system measures cost of goods sold by: Multiple choice question. counting inventory at the end of the period. estimating the amount of inventory sold. making entries to the inventory account for each purchase and sale. debiting cost of goods sold for all purchases of inventory.
counting inventory at the end of the period
Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following? Debit Sales Revenue Debit Inventory Debit Purchases Debit Accounts Payable
debit inventory
Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following? Multiple choice question. Debit Accounts Payable Debit Sales Revenue Debit Inventory Debit Purchases
debit inventory
Peter Company, a produce distributer, always tries to sell its oldest produce first. Peter company is allowed to use either the FIFO or Weighted-average cost flow assumptions. is allowed to use the FIFO, LIFO, or Weighted-average cost flow assumptions. is required to use the FIFO inventory cost flow assumption. is required to use the LIFO inventory cost flow assumption.
is allowed to use the FIFO, LIFO, or Weighted-average cost flow assumptions.