chapter 7 acct smartbook

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO and LIFO

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

FIFO uses the ___oldest___ cost for Cost of Goods Sold on the income statement and the ___newest___ cost for Inventory on the balance sheet.

What is subtracted from sales revenue to get net sales?

Net Sales on an income statement equals Sales Revenue minus Sales Returns, Allowances and Discounts

what are the inventory costing methods allowed by US GAAP?

FIFO LIFO weighted average specific identification

The Cost of Goods Sold equation is ______.

COG= Beginning Inventory + Purchases - Ending Inventory

If you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

FIFO

In a perpetual system, the entry to record the sale of merchandise to a customer on account would include a ______.

Record the sale: credit Sales Revenue debit to Accounts Receivable adjust inventory: credit to Inventory debit to Cost of Goods Sold

Merchandising Companies

Sell goods that have been obtained from a supplier

Which inventory system requires purchases of merchandise to be recorded in the inventory account instead of the purchases account?

The perpetual inventory system

When costs to purchase inventory are rising, using LIFO leads to reporting ______ cost of goods sold and ______ net income than FIFO.

When costs to purchase inventory are rising, using LIFO leads to reporting ___higher___ cost of goods sold and ____lower__ net income than FIFO.

Which financial statements will be misstated if the Year 1 ending inventory balance is understated? (Check all that apply.) Year 1 balance sheet year 2 balance sheet Year 1 income statement Year 2 income statement

Year 1 balance sheet Year 1 income statement Year 2 income statement

What does the sales discount 2/10, n/30 mean?

You can take a 2% discount if you pay within 10 days, or the full amount is due within 30 days.

Gross Profit Percentage

-measures the percentage of gross profit earned on each dollar of sales. -A higher gross profit percentage means that the company is selling products for a greater markup over its cost.

An understatement of the 2019 ending inventory will affect ______. (Check all that apply.) 2020 Cost of Goods Sold 2020 Beginning Inventory 2019 Cost of Goods Sold 2020 ending inventory

2020 Cost of Goods Sold 2020 Beginning Inventory 2019 Cost of Goods Sold

It is more useful to compare a company's inventory turnover with its own results from prior periods than with other companies' ratios ______.

because companies may use different accounting methods which may cause the turnovers to vary significantly

Goods Available for Sale equation

beginning inventory + purchases

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

Gross Profit equals ______.

net sales minus cost of goods sold

Which inventory system requires that the inventory account be updated at the time merchandise is sold?

perpetual

If Inventory is debited and Accounts Payable is credited, then the company uses the ______.

perpetual inventory system and is recording a purchase on account

Sales Revenue reports the ______.

sales price times the quantity of goods sold

manufacturing companies

sell goods that they have made themselves

Service Companies

sell services rather than physical goods

the assumption a company makes about its inventory cash flow affects what?

the balance sheet and income statement

True or false: In a periodic inventory system, Cost of Goods Sold is recorded at the end of the accounting period.

true

True or false: Specific identification is an inventory method typically used when accounting for expensive and unique inventory items.

true

FOB ______ is the term used when ownership of the goods transfers to a buyer as soon as the goods leave the seller's place of business. Multiple choice question.

shipping point

The gross profit percentage is the ratio to watch if you are worried about increased competition. If the company lowers its prices to retain market share without lowering its cost of goods sold, its gross profit percentage will ______.

decrease

FOB ______ is the term used when ownership of the goods transfers to a buyer when the goods arrive at the buyer's place of business.

destination

Which of the following costs should be added to the buyer's Inventory account?

freight in with terms FOB shipping point

The inventory turnover measures the ______.

number of times the average inventory balance is bought and sold

Multi-Step Income Statement

shows how much profit is earned from product sales without being clouded by other operating expenses and separates other items that are not core to the operations of the company.

The journal entry to record the payment for merchandise previously purchased on account will cause stockholders' equity to ______.

stay the same

What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

weighted average

On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Will Cost of Goods Sold be higher using a FIFO periodic inventory system or FIFO perpetual inventory system?

Cost of Goods Sold will be the same

To find a description of the inventory accounting method used by a company, you need to look at the ______.

notes to the financial statements

Which of the following should be debited to Inventory? purchases of merchandise on account freight-out freight-in if shipped FOB shipping point purchase discounts

purchases of merchandise on account freight-in if shipped FOB shipping point

Which inventory system requires that the purchases of merchandise on account be debited to Purchases?

periodic

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.

Probes, Inc. wrote down its inventory to the lower replacement value. The effect on Probes' accounting equation includes what?

decrease in stockholders' equity decrease in assets

On May 1, Widget Company had 10 gadgets in its Inventory that cost $5 each. On May 10, it sold 5 gadgets. On May 15, it bought 20 more gadgets that cost $6 each. At May 31, it had 25 gadgets in ending inventory. Cost of Goods Sold using LIFO perpetual will be ______ Cost of Goods Sold using LIFO periodic inventory.

lower than

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

Sales returns and allowances ______. (Select all that apply.) -reduce the amount the seller expects to receive from customers -are adjusted for at the end of the accounting period for estimated returns and allowance expected to occur in the following months -increases the amount the seller expects to receive from customers -are typically recorded after the initial sale when the actual return or allowance occurs -are required to be recorded at the time of the initial sale

-reduce the amount the seller expects to receive from customers -are adjusted for at the end of the accounting period for estimated returns and allowance expected to occur in the following months -are typically recorded after the initial sale when the actual return or allowance occurs

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be ______.

73 days

Which inventory costing method uses the oldest cost for Cost of Goods Sold on the income statement and the newest cost for Inventory on the balance sheet?

FIFO

In a perpetual inventory system, which of the following statements are true? The purchaser should record freight-in as a selling expense. The purchaser should record freight-in as an asset, Inventory. The seller should record freight-out as a selling expense. The seller should record freight-out as cost of goods sold.

The purchaser should record freight-in as an asset, Inventory. The seller should record freight-out as a selling expense.

True or false: The inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP.

True

what is the self correct idea and does it make it okay to make errors?

-over the two years, these errors offset one another. Inventory errors will "self correct" like this only if ending inventory is accurately calculated at the end of the following year and adjusted to that correct balance. -That these errors are self-correcting does not make them "Okay" they are still errors!

In a perpetual inventory system, the return of merchandise XYZ recently purchased on account will have the following effects on XYZ's accounting equation.

Assets will decrease. Liabilities will decrease.

LIFO uses the ______ unit costs for Cost of Goods Sold on the income statement and the ______ unit costs for Inventory on the balance sheet. Multiple choice question.

LIFO uses the ___newest___ unit costs for Cost of Goods Sold on the income statement and the __oldest____ unit costs for Inventory on the balance sheet. Multiple choice question.

In times of rising prices, why would a company choose LIFO over FIFO?

LIFO would result in a higher Cost of Goods Sold making the Income Tax Expense lower than FIFO.

On May 1, beginning inventory consists of 10 items at a cost of $8 each. On May 3, 10 items are purchased at $10 each. On May 8, 8 items are sold. On May 15, 10 items are purchased at $11 each. Cost of Goods Sold would be ______ using LIFO perpetual compared to using LIFO periodic.

Lower

In a perpetual inventory system, which of the following statements are true? The purchaser should record freight-in as an asset, Inventory. The seller should record freight-out as cost of goods sold. The purchaser should record freight-in as a selling expense. The seller should record freight-out as a selling expense.

The purchaser should record freight-in as an asset, Inventory. The seller should record freight-out as a selling expense.

Using a perpetual inventory system, the entry to record the return of goods you previously purchased on account includes a ______.

debit to Accounts Payable credit to Inventory

If a company were to ignore the fact that the market value of its inventory is lower than its cost, then ______.

its assets and stockholder's equity would be overstated (need to do a markdown on inventory to decrease inventory (assets) and increase COG (Expense-SE) in order to correct it)

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

If cost of acquiring inventory is rising, LIFO will result in which of the following compared to FIFO?

Cost of Goods Sold will be higher. Gross Profit will be lower. Income Tax Expense will be lower.

Multiple Choice QuestionYour Answer incorrect In a perpetual system, the entry to record the sale of merchandise includes a ______.

debit to Cost of Goods Sold

Inventory shrinkage as a result of theft, damage or obsolescence that is discovered during a physical inventory count at the end of the accounting period is recorded with a decrease to Inventory ______.

only in a perpetual system

Which inventory system updates the inventory account only at the end of the accounting period?

periodic

a benefit of ____________ inventory system is that inventory shrinkage from theft, fraud and error is able to be estimated

perpetual