Chapter 6 Study Set

FOB shipping point means title to the goods passes

When they are shipped

Companies that produce the inventory they sell are referred to as

manufacturers

Inventory is classified 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

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

Cost of goods sold Inventory

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

Inventory Cost of goods sold.

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

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

LIFO

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

Raw materials Finished goods Work in process

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

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

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

Perpetual inventory system

Match each scenario with the type of inventory system

Perpetual inventory system = Peter Company recognizes cost of goods sold each time it recognizes a sale Periodic inventory system = Sherman company recognizes cost of goods sold after completing a physical inventory.

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

FIFO

Purchasing inventory on account:

Increases assets Increases liabilities

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

Debit Inventory

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

Cost of goods sold Inventory

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

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statement?

Stockholders' equity increases Total assets increase Net income increases

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

FIFO

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

Which of the following methods are not used for inventory costing?

NIFO Simple-Average

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

FIFO

Which of the following represent reasons why managers closely monitor inventory levels?

To ensure that sufficient units are available To minimize costs of inventory writedowns due to obsolete inventory

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

Two

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

Work in process

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

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

LIFO

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

LIFO

Accounting errors must be corrected

As soon as they are discovered

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

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

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

Assets will increase

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

Cost of goods sold inventory

The shipping term FOB stands for

Free on board

In times of rising prices, the cost of goods sold determined using the LIFO inventory assumption typically will be ____ than the cost of goods sold determined using the FIFO inventory assumption.

Higher

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

Immediately

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

Included in Gerald's inventory

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.

Incurred several years earlier

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 _____

LIFO reserve

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

LIFO reserve

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

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

Manufacturers

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

Outdated

Which of the following methods are available for costing inventory?

FIFO Weighted-average Specific identification LIFO

Math 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 cost.

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

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:

Overstated net income

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

Paid by the supplier

A multiple-step income statement reports multiple levels of

income