Chapter 6 SmartBook

Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler's ending inventory equals:

$15,000

free on board.

The shipping term FOB stands for

The cost of unsold inventory at the end of the year is classified as a(n)_______ in the ___________ _________.

Asset, balance sheet

Which of the following items may be classified as nonoperating revenues and expenses for a company that manufactures televisions?

Interest revenue Gain from sale of land Interest expense

Which of the following sells inventory to end users?

Retailers

LIFO

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?

The ____ inventory system records all inventory-related transactions in the Inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale. The _____ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period.

Blank 1: perpetual Blank 2: periodic

Items a company intends to sell in the normal course of business, has in production for future sale, or uses currently in production, are all examples of what? a. Inventory b. Work in process c. Raw materials d. Investments

Inventory

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 disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the

LIFO reserve

Wholesale and retail companies <<<--->>> Purchase goods that are primarily in completed form.

Manufacturing companies <<<--->>> Purchase goods that are used to produce another product.

FIFO

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

Perpetual inventory system

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

When inventory quantities _____ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system. a. increase b. decline c. stay the same

decline

The LIFO inventory method assumes that the units that remain in ending inventory are

the oldest units in inventory.

Which of the following accounts are typically reported on the balance sheet of a manufacturing company? (Select all that apply.) a. cost of goods sold b. work in process c. merchandise inventory d. finished goods e. raw materials

work in process finished goods raw materials

The LIFO inventory method assumes that the units that remain in ending inventory are a. the most recent units purchased. b. an average of all units. c. the oldest units in inventory. d.

the oldest units in inventory.

inventory. cost of goods sold.

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

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

assets will increase.

ChoiceShelly Company must first take a physical inventory to determine the cost of inventory still on hand. Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

Periodic inventory system matches

A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs. a. perpetual; periodic b. periodic; periodic c. periodic; perpetual d. perpetual; perpetual

perpetual; perpetual

Companies that produce the inventory they sell are referred to as __

Blank 1: manufacturers or manufacturing

Chase Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Rounding to the nearest percent, the company's gross profit ratio would be a. 57%. b. 47%. c. 53%. d. 50%.

50%. Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($7 million -$3.5 million)/$7 million

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory? a. Weighted-average b. FIFO c. LIFO

LIFO In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in lower ending inventory.

Schoen Corporation internally accounts for its inventory using the FIFO cost flow assumption, but uses LIFO for external reporting. Its current year inventory ending balance under FIFO is $15,000; under LIFO, the ending balance would be $11,000. The journal entry to adjust FIFO to LIFO is:

debit cost of goods sold and credit inventory for $4,000

Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.) a. goods sold. b. sales revenue. c. purchases. d. ending inventory.

goods sold. ending inventory.

Blog Inc., has net sales of $50,000, cost of goods sold of $30,000, and selling expenses of $5,000. Its gross profit is ______.

$20,000

Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory. a. Office supplies b. Patents c. Desks d. Mouse pads

Mouse pads

False

True or false: The inventory cost flow assumption must match the physical flow of inventory units.

Peter Company, a produce distributer, always tries to sell its oldest produce first. Peter company

is allowed to use the FIFO, LIFO, or Weighted-average cost flow assumptions.

FIFO

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

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

What type of companies recognize revenues when they sell inventory to customers?

Manufacturing companies Merchandising companies

How is income tax reported on a multiple-step income statement?

Separately after non-operating revenues and expenses

multiple-step

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.

The LIFO difference (sometimes called LIFO reserve) helps investors

compare the performance of companies that use different cost flow assumptions.

Under a perpetual inventory system, the entry to record the return of goods previously purchased on account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is:

correct

The _____ inventory method assumes that the units in ending inventory were the items acquired first. a. last-in, first-out b. weighted average c. first-in, first-out

last-in, first-out

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year. a. first; last b. base; layer c. last; first d. layer; base

layer; base

A _____ company resells goods while a _____ company produces goods. a. merchandising; retail b. manufacturing; retail c. manufacturing; merchandising d. merchandising; manufacturing

merchandising; manufacturing

The estimated selling price of inventory less any costs of completion, disposal, and transportation is referred to as:

net realizable value

Under the _____ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.

perpetual

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

perpetual only

The estimated selling price of inventory less costs necessary to sell the inventory is referred to as net _____ _____.

realizable value

Service companies _____ revenues when the service is provided to customers.

record

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

The lower of cost and net realizable value method causes losses in the value of inventory to be recognized in the period when

the value declines below cost.

_____ inventory refers to the products that have been started in production, but are still incomplete.

work-in-process

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

included in Gerald's inventory.

Inventory is classified as

A current asset

inventory

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:

income

A multiple-step income statement reports multiple levels of

counting inventory at the end of the period.

A periodic inventory system measures cost of goods sold by

Where is inventory reported in the financial statements? Multiple choice question. Income statement as revenue Statement of cash flows as an investing activity Balance sheet as a current asset Balance sheet as a noncurrent asset

Balance sheet as a current asset

Where is inventory reported in the financial statements? Multiple choice question. 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

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

Blank 1: FIFO or first-in-first-out

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods. Multiple select question. Sales Revenue Cost of Goods Sold Purchases Inventory

Cost of Goods Sold Inventory

"Cost of sales" is another name for which of the following accounts?

Cost of goods sold

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

Cost of goods sold and Inventory

Which of the following methods are available for costing inventory? (Select all that apply.)

FIFO Specific identification LIFO Weighted-average

The cost of goods not yet sold is recorded in the ______ account, whereas the cost of goods that are sold to customers is recorded in _____.

Inventory; Cost of Goods Sold

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income? a. weighted-average b. LIFO c. FIFO

LIFO In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold and lower income.

Match the inventory cost flow assumption with the financial statement approach.

LIFO Income statement approach FIFO Balance sheet approach

Which disclosure allows financial statement users to compare companies that use LIFO to companies that use FIFO?

LIFO reserve

What type of company purchases raw materials and makes goods to sell? Multiple choice question. Manufacturers Wholesalers Retailers

Manufacturers

Which of the following methods are not used for inventory costing? (Select all that apply.)

NIFO Simple-average

Balance sheet as a current asset

Where is inventory reported in the financial statements?

Inventory is classified as Multiple choice question. a current liability. a current asset. a noncurrent asset. a revenue.

a current asset.

The average cost method assumes that ending inventory consists of a. the oldest units in inventory. b. the most recently purchased units. c. a mixture of all the goods available for sale.

a mixture of all the goods available for sale.

The dollar-value LIFO (DVL) inventory method a. allows a broader range of goods to be included in pools. b. requires pooled inventory to have similar physical characteristics. c. complicates recordkeeping procedures.

allows a broader range of goods to be included in pools.

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

fifo

Correctly match the shipping costs with the accounting treatment.

freight in: added to the cost of inventory freight out: recognized as operating expense

Ownership of inventory at the end of the accounting period is determined for (Select all that apply.) a. unfulfilled sales orders. b. goods shipped to customers. c. unfulfilled purchase orders. d. goods shipped by suppliers.

goods shipped to customers. goods shipped by suppliers.

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

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

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs Multiple choice question. that have not yet been incurred. incurred several years earlier. incurred solely on the balance sheet date.

incurred several years earlier.

Freight-in is recorded as part of ______, whereas freight out is often recorded as ______.

inventory; selling expense

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

FOB shipping point means title to the goods passes

when they are shipped.

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

Cost of goods sold inventory

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

inventory

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

Blank 1: lower, smaller, or less

_____ companies purchase inventory that is primarily in finished form and ready for resale to customers.

merchandising

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.

more

LIFO inventory pools a. simplify recordkeeping. b. prevent liquidation of layers. c. result in lower cost of goods sold.

simplify recordkeeping.

Which inventory costing method assumes that items sold are those that were acquired first? a. FIFO b. Average cost c. LIFO

LIFO

Merchandising, Merchant, Retail, Wholesale, or Merchandise

companies purchase inventory that is primarily in finished form and ready for resale to customers.

The lower of cost and net realizable value method represents a(n) _____ approach in accounting.

conservatism

In a perpetual inventory system the inventory account is a. adjusted at the end of each month. b. continually adjusted. c. adjusted at the end of the year.

continually adjusted.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold? FIFO a. Weighted-average b. LIFO c. FIFO

FIFO In a period of rising prices, FIFO results in goods with the lowest cost beings old first resulting in the lowest cost of goods sold

True or false: Income tax expense may be disclosed either on the income statement or in the notes to the financial statements.

False

True or false: The inventory cost flow assumption must match the physical flow of inventory units.

False

Which inventory account consists of the cost of items for which the manufacturing process is complete?

Finished goods inventory

On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as ___________ revenues and expenses.

Nonoperating

Raw materials, direct labor, and manufacturing _________ are the three costs related to the manufacturing of products.

Overhead

the most recent units purchased.

The LIFO inventory method assumes that the units sold are

The balance of the Cost of Goods Sold account at the end of the year represents:

The cost of inventory sold in the current year.

If a company pays freight-in for its inventory, that amount will later be included in

cost of goods sold

The _____ _____ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

inventory turnover

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

specific identification

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method. Multiple choice question. weighted-average matching unit actual cost specific identification

specific identification

The primary benefit of LIFO is:

tax savings

A DVL pool is made up of items a. that have similar physical characteristics. b. from different purchases within the same year. c. that are likely to have similar cost change pressures.

that are likely to have similar cost change pressures.

Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production.

Raw materials inventory

The weighted average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

Gross Profit is Multiple choice question. Revenue minus Expenses. Net Sales Revenue minus Cost of Goods Sold. Beginning Inventory plus Purchases minus Ending Inventory. Revenue minus Inventory.

Net Sales Revenue minus Cost of Goods Sold.

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

Perpetual inventory system

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

The definition of inventory includes which of the following items?

The FIFO method assumes that units sold are the _________ units acquired and that units remaining in ending inventory are the ________ units purchased. a. first; last b. first; first c. last; first d. last; last

first; last

The purchase discount term, 2/10, n/30, means that the purchaser ______.

has 10 days from the purchase date in which to pay and receive a 2% discount

Combining operating income with non-operating revenues and expenses yields

income before income taxes

merchandising

Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.

Which of the following considerations may influence managers' choice of the FIFO inventory cost flow assumption for a company that experiences rising prices?

Compensation/bonus tied to reported income Meeting earnings targets Increases stock prices

Which of the following items are included in calculating operating income?

General and administrative expenses Cost of goods sold Utility expense

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. Purchases Inventory Raw Materials Cost of Goods Sold

Inventory

Which of the following contributes to the importance of properly determining the cost of inventory and the cost of goods sold?

Inventory may be the largest asset on some companies' balance sheets Cost of goods sold may be the largest expense on some companies' income statement

Assuming that prices rise over time, which inventory cost flow assumption will result in the highest cost of goods sold? a. LIFO b. FIFO c. Weighted-average

LIFO In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold.

Companies that produce the inventory they sell are referred to as ______________.

Manufactures

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

A LIFO liquidation occurs when inventory quantities ______. a. decrease b. stay the same c. increase

decrease

The gross profit ratio is computed as _____ divided by net sales. a. cost of goods sold b. revenue c. net income d. gross profit

gross profit

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

Which of the following concepts or principles is especially relevant to the lower of cost and net realizable value rule?

Conservatism

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

FIFO

The definition of inventory includes which of the following items?

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

What is included in the cost of merchandise inventory? (Select all that apply.) a. The purchase price of the goods. b. Necessary costs incurred to get the goods in location for sale. c. Sales commissions paid to the wholesale company employees.

The purchase price of the goods. Necessary costs incurred to get the goods in location for sale.

Cost of goods sold divided by average inventory is

Inventory turnover

Net sales revenue minus cost of goods sold is

gross profit.

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer? a. 0.50 b. 2 c. 1

2

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

FIFO

To calculate the amount in the inventory account, which of the following occurs?

Freight-in is added to the cost of inventory Purchase discounts are subtracted from the cost of inventory Purchase returns are subtracted from the cost of inventory

Select all that apply The definition of inventory includes which of the following items? Multiple select question. Items held for use or disposal Items used currently in the production of goods to be sold Items currently in production for future sale Items held for resale

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

Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

Perpetual inventory system matches

is allowed to use the FIFO, LIFO, or Weighted-average cost flow assumptions.

Peter Company, a produce distributer, always tries to sell its oldest produce first. Peter company?

increases liabilities increases assets

Purchasing inventory on account:

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.

Managers may want to report to use FIFO to report higher assets and profitability to satisfy shareholders or increase stock price.

True

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

Work in process

Which of the following accounts would be found on the balance sheet of a manufacturing company? a. cost of goods sold b. work in process c. merchandise inventory

Work in process

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

Work in process Raw materials Finished goods

When a company adjusts its own FIFO inventory records at year-end to a LIFO basis for financial statements, the company must:

debit cost of goods sold credit inventory

A periodic inventory system (Select all that apply.) a. does not continuously track the cost of merchandise sold. b. continuously tracks the cost of merchandise sold. c. continuously tracks the quantity of merchandise. d. does not continuously track the quantity of merchandise.

does not continuously track the cost of merchandise sold. does not continuously track the quantity of merchandise.

Income before income taxes is calculated by combining operating income with

non-operating income

The dollar-value LIFO (DVL) method (Select all that apply.) a. reduces the risk of liquidation of layers. b. increases the risk of liquidation of layers. c. simplifies recordkeeping. d. prevents liquidation of layers.

reduces the risk of liquidation of layers. simplifies recordkeeping.

Weighted-average unit cost is determined by dividing cost of goods available for sale by

total quantity available for sale.

At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. The net realizable values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. Using the lower of cost and net realizable value method, CurlZ should report its inventory at:

$1,000 The lower of cost and net realizable value method requires the DyeZ boxes be recorded at the lower selling price of $8 instead of the higher cost of $10. Thus, Inventory equals $1,000 = ((200 bottles x $1) + (100 boxes x $8)).

Bern Company has 100 units costing $200 in beginning inventory. During the year, the company purchases 900 additional units for $1,980. At the end of the year, 200 units remain unsold. If Bern Company utilizes the LIFO method, ending inventory will be

$420. Rationale: ($1,980/900 x 100) +$200 = $420

Palmer Company's beginning inventory consists of 1,000 units at $1.00 per unit. During the year, the company purchases 5,000 units costing a total of $5,800. At the end of the accounting period, Palmer still has 1,000 units on hand. If Palmer uses the weighted average cost method, its cost of goods sold (rounded to the nearest dollar) will be

$5,667. Rationale: 5,000 x [(1,000 + 5,800)/6,000]

Adam Company has 100 units costing $300 in beginning inventory. During the year, the company purchases 900 units for a total cost of $2,880. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, the cost of ending inventory will be

$640. Rationale: $2,880/900 x 200 = $640

Which of the following statements is correct?

A company can apply more than one inventory cost flow assumption.

True

A company may use more than one inventory cost method. t or F

The cost of the goods that a company sold during a period is shown in its financial statements as ___________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as __________.

Cost of goods; inventory

A periodic inventory system measures cost of goods sold by

Counting inventory at the end of the period

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

Match the inventory cost flow assumptions on the left with the scenario on the right.

FIFO Most closely approximates the actual physical flow of inventory LIFO Provides better matching of current revenues with current inventory costs

Bernie Corp. uses the FIFO inventory method to calculate cost of goods sold for financial reporting purposes. Which of the following methods can Bernie use for tax purposes?

FIFO and weighted-average only

Consistent with International Financial Reporting Standards, which of the following cost flow assumptions are currently permitted?

FIFO, weighted-average

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

LIFO

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting. a. Average cost b. LIFO c. FIFO

LIFO

The _____ cost flow assumption more realistically matches the current cost of inventory with current sales revenue.

LIFO

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

LIFO

When prices increase, the ______ inventory method tends to decrease a company's tax liability during a particular fiscal period.

LIFO

Vogel Company maintains its inventory records using the FIFO assumption, but reports its inventory consistent with LIFO. At the end of the year, Vogel converts its inventory balance from FIFO to LIFO by using the

LIFO adjustment

Another name for the LIFO reserve account is a. LIFO allotment. b. LIFO asset. c. LIFO allocation. d. LIFO allowance.

LIFO allowance.

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

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

LIFO reserve

Which of the following inventory cost flow assumptions is prohibited under International Financial Reporting Standards?

Last in, first out

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

Manufacturers

Companies that produce the inventory they sell are referred to as _____.

Manufacturing

The goods a wholesale company purchases in finished form are referred to as what? a. Merchandise inventory b. Manufactured inventory c. Finished goods

Merchandise inventory

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

Which of the following are disadvantages of unit LIFO? (Select all that apply.) a. Disallowed by U.S. GAAP b. Possibility of LIFO liquidation c. Inventory pools are costly to implement d. Significant recordkeeping costs

Possibility of LIFO liquidation Significant recordkeeping costs

Beginning inventory is $60,000. Purchases of inventory during the year are $100,000. Cost of goods sold is $120,000. What is ending inventory?

Rationale: $60,000 + $100,000 - $120,000 = $40,000.

Bern Company has 100 units costing $200 in beginning inventory. During the year, the company purchases 900 additional units for $1,980. At the end of the year, 200 units remain unsold. If Bern Company utilizes the LIFO method, cost of goods sold will be

Rationale: ($1,980/900 x 800) = $1,760

True or false: A company may use more than one inventory cost method.

True

True or false: Determining inventory-related amounts is very important because for some companies cost of goods sold represents the largest expense on the income statement.

True

True or false: When goods are sold, the cost of the goods is transferred from the Inventory account to the Cost of Goods Sold account.

True

True

True or false: A company may use more than one inventory cost method.

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____. a. at the end of the period; at the end of the period b. each time goods are sold; at the end of the period c. at the end of the period; each time goods are sold d. each time goods are sold; each time goods are sold

at the end of the period; each time goods are sold

The ratio that indicates the approximate number of days the average inventory is held is referred to as the:

average days in inventory

Which of the following items are readily available from an inventory account under the perpetual inventory system?

beginning inventory balance cost of units sold individual purchases ending inventory balance

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.)

debit to Accounts Payable credit to Inventory.

Recording a write-down of inventory from cost to its lower net realizable value includes:

debit to Cost of Goods Sold credit to Inventory

Freeze Corporation uses the lower of cost or net realizable value method to write down inventory. Freeze determines that the inventory should be written down by $1,000. The effect on the financial statements is to:

decrease assets decrease stockholders' equity decrease net income

The cost of inventory includes (Select all that apply.) a. the cost to store the inventory once it arrives at desired location b. expenditures to acquire the inventory c. the cost to bring inventory to its desired condition d. the cost to bring inventory to its desired location

expenditures to acquire the inventory the cost to bring inventory to its desired condition the cost to bring inventory to its desired location

True or false: A periodic inventory system allows management to determine the amount of goods on hand without having to take a physical count. a. True b. False

false

A multiple-step income statement reports multiple levels of _____.

income

Purchasing inventory on account:

increases assets increases liabilities

Select all that apply Purchasing inventory on account: Multiple select question. decreases assets increases equity increases liabilities decreases equity increases assets

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.

The definition of inventory includes which of the following items? (Select all that apply.) a. items held for resale b. items held for use or disposal c. items currently in production for future sale d. items used currently in the production of goods to be sold

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

The FIFO inventory method assumes that units remaining in ending inventory are the _____ units purchased.

last

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

less

Use of LIFO inventory pools reduce the chance of unintentional LIFO layer _____.

liquidation

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

Revenues and expenses arising from activities that are not part of the company's operations are classified as ______ revenues and expenses.

nonoperating

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

outdated

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

A company is most likely to utilize the specific identification method if its inventory consists of

unique products. very expensive products.

High recordkeeping costs and possible LIFO liquidation are disadvantages of a. dollar value LIFO. b. LIFO inventory pools. c. unit LIFO.

unit LIFO.

The specific identification method

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

Inventory not yet sold is classified as a(n) _____ in the _____ _____.

Asset, Balance Sheet

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been a. $1,000 lower. b. $2,000 lower. c. $2,000 higher. d. $1,000 higher.

$2,000 higher.

when they are shipped.

FOB shipping point means title to the goods passes

The specific identification method (select all that apply): a. is not an acceptable method of accounting b. matches each unit of inventory with its actual cost c. would be beneficial to a company that makes fine jewelry d. would be beneficial to a company that makes inexpensive products with high sales volume

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

Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.

merchandising

Which inventory system allocates cost of goods available for sale only at the end of each reporting period? a. both periodic and perpetual b. periodic inventory system c. perpetual inventory system

periodic inventory system

A(n) _____ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise.

perpetual

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the 2016 fiscal year would have been a. $50,000 lower if it had used FIFO. b. $150,000 higher if it had used FIFO. c. $150,000 lower if it had used FIFO. d. $50,000 higher if it had used FIFO.

$150,000 higher if it had used FIFO.

Beginning inventory is $20,000. Purchases of inventory during the year are $100,000. Ending inventory is $50,000. What is cost of goods sold?

$70,000

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016? a. $722,000 b. $723,600 c. $724,500 d. $758,100

$723,600 $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016? a. $722,200 b. $755,000 c. $815,400 d. $758,200

$758,200 $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

Bottom, Inc. paid an invoice for $1,000, with discount terms of 1/7, n/30, within the discount period. The net amount paid was:

$990

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

Maier Company purchases inventory from Kunze Corporation and debits inventory and credits accounts payable to record the transaction. Which of the following journal entries would Kunze make to record the sale?

Debit accounts receivable, credit sales revenue

Which of the following costs are recognized in work in process for a manufacturing company?

Direct labor Overhead Raw materials

When inventory is sold, the cost of inventory is recognized as a(n) _____

Expense

Adam Company has 100 units costing $300 in beginning inventory. During the year, the company purchases 900 units for a total cost of $2,880. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, cost of goods sold will be

Rationale: 800 units have been sold. 100 units from beginning inventory at $300 plus 700 units from the units purchased at $2,240 ($2,880/900 x 700) equals $2,540

Determining ownership of goods that are in transit at the end of the accounting period is important to a. determine an accurate arrival time. b. determine who must pay shipping. c. assure proper inventory cutoff.

assure proper inventory cutoff.

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

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

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to a. avoid all inventory liquidations. b. combine all goods in one single inventory pool. c. combine a large variety of goods in one pool.

combine a large variety of goods in one pool.

Catalina Bookstore pays freight on books shipped to its store. The shipping cost is debited to Inventory. When the books are sold, the freight costs pertaining to the books are included in:

cost of goods sold

The formula for inventory turnover is

cost of goods sold divided by average inventory.

Select all that apply 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. cost of goods sold. liabilities. inventory.

cost of goods sold. inventory.

Some companies refer to "cost of goods sold" as

cost of merchandise sold cost of sales cost of products sold

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

paid by the supplier

Freight-in on inventory purchases is typically recognized as

part of the cost of purchasing inventory.

Which inventory system allocates cost of goods available for sale only at the end of each reporting period? a. perpetual inventory system b. both periodic and perpetual c. periodic inventory system

periodic inventory system

The Work-in-Process inventory account typically includes which costs?

raw materials direct labor indirect manufacturing costs

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

_____ resell inventory to retail companies or to professional users, whereas retailers sell inventory to end users.

Wholesalers

Freight-in is

Included as a cost of inventory

The FIFO method assumes that units sold are the _____ units acquired.

first

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been a. $1,000 lower. b. $1,000 higher. c. $2,000 lower. d. $2,000 higher.

$2,000 lower. Currently cost of goods sold is computed using the 1,000 units at $20 plus 200 units at $10 so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been higher resulting in lower pretax income.

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 :

Compensation/bonus tied to reported income Meeting earnings targets Increases stock prices

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be a. 58%. b. 40%. c. 60%. d. 42%.

40%. Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($5 million -$3 million)/$5 million

Which of the following companies would be most likely to utilize the specific identification method?

Adams Company produces one-of-kind products.

Which of the following items are reported in operating income?

Advertising expenses Revenues Selling expenses

What type of expenditures should be included in the cost of inventory of a manufacturing company? (Select all that apply.) a. Expenditures necessary to bring inventory to sales location. b. Cost of storing inventory after it has arrived at sales location. c. Expenditures necessary to acquire inventory.

Expenditures necessary to bring inventory to sales location. Expenditures necessary to acquire inventory.

How is cost of goods sold classified in the financial statements?

Expense in the income statement

Higher, greater

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

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.

lower, smaller, or less

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

Janex Company manufactures refrigerators. Which of the following items is classified as nonoperating expense

Interest 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:

Inventory

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

Inventory

Prather Inc. has sales of $100,000, sales returns of $5,000, cost of goods sold of $60,000, and selling expenses of $3,000. Calculate gross profit.

Rationale: Net sales is $95,000 ($100,000 - 5,000). Net sales of $95,000 less cost of goods sold of $60,000 = $35,000.

Advantages of using LIFO inventory pools include which of the following? (Select all that apply.) a. Account for each type of inventory separately b. Reduce the risk of LIFO layer liquidations c. Simplify recordkeeping

Reduce the risk of LIFO layer liquidations Simplify recordkeeping

the oldest units in inventory.

The LIFO inventory method assumes that the units that remain in ending inventory are?

LIFO reserve

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the

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

Two

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

Two Rationale: Two entries are required: One entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory.

assets increase by the sales price of the inventory assets decrease by the cost of the inventory

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

stockholders' equity increases net income increases total assets increase

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)

Expense

When inventory is sold, the cost of inventory is recognized as a?

Simple-average NIFO

Which of the following methods are not used for inventory costing? (Select all that apply.)

The average cost method assumes that cost of goods sold consists of a. the most recently purchased units. b. the oldest units in inventory. c. a mixture of all the goods available for sale.

a mixture of all the goods available for sale.

Cost flow _____ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.

assumptions

_____ _____ inventory consists of items for which the manufacturing process is complete.

finished goods

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

FIFO

For internal record keeping, most companies carry their inventory using the _____ basis.

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

Blank 1: inventory

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

FIFO

Which inventory costing method matches each unit sold with its actual cost? a. Specific identification b. FIFO c. Average cost d. LIFO

Specific identification

newest, recent, last, latest, or new

The FIFO inventory method assumes that units remaining in ending inventory are the ________ units purchased.

first, earliest, or oldest

The FIFO method assumes that units sold are the____________ units acquired.

At year end, CurlZ Inc.'s inventory consists of 100 bottles of CleanZ with a cost of $1, and a selling price of $0.80 per bottle. It also has 100 boxes of DyeZ with a cost of $10, and a selling price of $11 per box. Using the lower of cost and net realizable value method, the year-end Inventory balance should include which of the following amounts?

The selling price of $80 for the CleanZ bottles. The cost of $1,000 for the DyeZ boxes.

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

_____ _____ inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

raw materials

Berta Company's inventory value has declined during the current period. Berta does not expect to sell its inventory during the current year. Berta should recognize the loss in the period when the inventory

value declines.

FOB destination means title to the goods passes

when they arrive at the destination.

Select all that apply The specific identification method (select all that apply): Multiple select question. is not an acceptable method of accounting would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost would be beneficial to a company that makes inexpensive products with high sales volume

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