Chapter 6
The lower of cost and net realizable value method was developed to
avoid reporting inventory at an amount that exceeds the benefits it provides.
In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs
incurred several years earlier.
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
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
Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.
inventory COGS
Where is inventory reported in the financial statements?
Balance sheet as a current asset
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
The definition of inventory includes which of the following items?
Items used currently in the production of goods to be sold Items currently in production for future sale Items held for resale
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?
LIFO
Which of the following methods are available for costing inventory? (Select all that apply.)
LIFO Specific identification Weighted-average FIFO
The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the
LIFO reserve
FIFO
Most closely approximates the actual physical flow of inventory
Which of the following methods are not used for inventory costing? (Select all that apply.)
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
Which of the following accounts would be found in the balance sheet of a manufacturing company?
Work in process
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
Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.)
cost of goods sold.inventory.
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
Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are
included in Gerald's inventory.
Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are
paid by the supplier.
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 shipping point means title to the goods passes
when they are shipped.
FOB destination means title to the goods passes
when they arrive at the destination.