Chapter 6

COGS equation

=Beg inv+purchases-ending inventory

Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system?

Cost of incoming freight charges on merchandise inventory-freight charges on inventory account. Returns & purchase discounts decrease the account balance

If A sells to B, and B obtains title while goods are in transit, the goods were shipped______. If C sells to D, and C maintains title until the goods arrive at D's door then the goods were shipped_____

FOB shipping pt, FOB destination

During a period of rising prices, which inventory flow assumption would result in the highest cost of goods sold and thereby the lowest net income?

LIFO

which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue

LIFO

The cost of unsold inventory at the end of the year is classified as a(n) ________ in the ________ a. asset; balance sheet b. expense; income statement c. liability; balance sheet d. revenue; income statement

a. asset; balance sheet

One of the major differences between service companies and retail or manufacturing companies is that retailers and manufactures must account for: a. current assets b. inventory c. selling expenses d. deferred revenue

b. inventory (service companies sell a service not a product (inventory))

LIFO is considered the income statement approach for reporting inventory because

better approximates inventory cost necessary to generate revenue...since we are using recent costs

Inventory does not include a. materials used in the production of goods to be sold b. assets intended to be sold in the normal course of business c. equipment used in the manufacturing of assets for sale d. assets currently in production for sales

c. equipment used in the manufacturing of assets for sale

Cost of goods sold equals: a. beginning inventory-net purchases +ending inventory b. beg inventory- accounts payable- net purchases c. net purchases+ ending inventory -beginning inventory d. beg inv+net purchases- ending inventory

d. beginning inventory+ net purchases-ending inventory

Costs that are expensed when incurred are called? a. product costs b. direct costs c. inventoriable costs d. period costs e. indirect costs

d. period costs (period costs include: selling expenses, advertising expenses, administrative expenses)

Which of the following statements is true? a. product costs affect only the balance sheet b. product costs affect only the income statement c. period costs affect only the balance sheet d. neither product costs or period costs affect the statement of retained earnings. This can also be a true statement if the period costs were prepaid (i.e. prepaid advertising, depreciation) e. product costs eventually affect both the balance sheet and the income statement)

e. product costs eventually affect both the balance sheet and the income statement (inventory ---> costs of good sold)

in accounting for inventory, the assumed cost flow must match the physical goods flow true false

false

for most companies, actual physical flow inventory follows LIFO true false

false, most often the actual physical flow of goods follow FIFO

During the periods of rising costs, FIFO generally results in a higher COGS true false

false- during periods of rising costs FIFO generally results in a lower costs of goods sold

when the value of inventory falls below its cost, companies other than those that use LIFo, have the option of recording the inventory at cost or the lower net realizable value true false

false-companies MUST report inventory at the lower of cost and net realizable value

during periods of rising costs, LIFO generally results in a higher ending inventory balance true false

false-during periods of rising costs, LIFO generally results in a lower ending inventory balance since earliest costs are assigned to inventory

Goods in transit shipped FOB shipping pt should be included in the seller's ending inventory true false

false-purchaser's inventory

Using LIFO, the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system true false

false-the amount reported for ending inventory (or COGS) will differ

Using the weighted-average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year true false

false-the average weighted-cost which includes both beg inventory and purchases and is equal to total COGAFS divided by the total number of units available for sale

average days in inventory def and calculation:

indicates the approximate # of days the average inventory is held...365/inventory turnover ratio

the choice of inventory cost flow assumption affects which of the following amounts

inventory, costs of goods sold, gross profit

a perpetual inventory system measures COGS by:

making entries to the inventory account for each purchase and sale

the practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles

matching principle and conservatism (want to record assets not to overstate it)

In a periodic inventory system, the entry at the time of a sale to record the cost of inventory sold includes

not recorded at this time of the sale

Which level of profitability is considered profit from normal operations?

operating income (income before taxes and net income include non-operating items, which are not considered part of normal operations)

the primary distinction between operating activities and non-operating activities in a multiple-step income statement is whether the activity is:

part of primary business operations

In a periodic inventory system, the purchase of inventory is debited to

purchases

cost of goods sold is:

reported in the income statement as an expense

the gross profit ratio will typically be higher for companies that:

sell products that are more highly specialized or require higher operating expenses (advertising)

the gross profit ratio measures

the amount by which the sale of inventory exceeds it cost per dollar of sales

the inventory turnover ratio measures and calculation:

the times per period the average inventory balance is sold...COGS/average inventory

A business may use the periodic or perpetual inventory systems for different types of inventory true false

true

The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO true false

true

companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and COGS true false

true

generally a high inventory ratio reflects positively on a company's ability to manage its inventory true false

true

the adjustment to write down inventory from cost to its lower NRV includes a debit to COGS and a credit to inventory true false

true

the portion of cost of goods available for sale that is not assigned to ending inventory is assigned to COGS true false

true