Chapter 7 cost of goods sold and inventory (ACCT Exam 2)

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

True or false: Regardless of the inventory costing method used, the financial statements will always report the same amount of inventory on the balance sheet and cost of goods sold on the income statement.

False: The different methods typically result in different amounts on the balance sheet and income statement because each method assumes different inventory items with different costs are sold. For example, FIFO assumes the older items are sold first and LIFO assumes the newer items are sold first.

A company had a beginning inventory of 5 units that cost $10 each. During the month, 15 units were purchased for $11 each. The company sold 12 units during the month and had 8 remaining in the ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be

$5 more than if it had used LIFO.

Which of the following statements are true?

- An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory. - An increased inventory balance is desirable if management is building up stock in anticipation of higher sales.

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ______.

- Detect shrinkage - Detect bookkeeping errors - Detect theft

Using a perpetual inventory system, the effect on the accounting equation of purchasing merchandise on account includes a

- Increase in assets - Increase in liabilities

In a perpetual inventory system, which of the following statements are true?

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

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. Using perpetual LIFO, ending inventory at May 31 equals ______.

220

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.

302

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is

65

A decrease in Inventory will be ______ net income when determining net cash flow provided by ______ activities on the statement of cash flows.

Added back to: operating

The assumption that a company makes about its inventory cost flow has

An effect on the company's balance sheet and income statement

Independent Verification

Compare perpetual records to periodic physical counts of inventory

An increase in a company's inventory balance from a prior year is ______ if the inventory turnover ratio is

Desirable: higher

Which inventory costing method assumes that the inventory's cost flows out in the same order the goods are received?

FIFO

True or false: An error in ending inventory in Year 1 will cause ending inventory in Year 2 to be misstated as well.

False: The Year 2 ending inventory is based on a physical count and is thus not affected by the error made in Year 1. The error made in Year 1 is corrected (or offset) by misstating the Year 2 cost of goods sold.

FIFO, an inventory costing method, actually describes how to calculate the cost of

Goods sold

LIFO liquidation occurs when

Items from beginning inventory become part of cost of goods sold

Applying the lower of cost or net realizable value rule results in inventory being reported at the

Market value if lower than cost

In a perpetual inventory system, Inventory is reduced by

Purchase discounts

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

The perpetual inventory system

The perpetual 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.

Specific identification is

an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item

In a perpetual inventory system, Inventory is initially recorded at

cost

Separate Duties

do not make one employee responsible for the accounting and handling of inventory

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

expense along with the related sales revenue.

When costs are rising and a purchase occurs after the last sale, cost of goods sold will be ______ using LIFO periodic than using LIFO perpetual.

higher

restrict access

limit the handling of inventory to authorized personnel only

Generally accepted accounting principles (GAAP) require that any company using LIFO

must report the FIFO value of the same inventory in the notes to the financial statements

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

oldest; newest

The periodic inventory system uses

separate accounts for these items and records the cost of goods sold at the end of the accounting period.

Inventory is expensed when

sold

An increase in Inventory will be ______ net income when determining net cash flow provided by operating activities.

subtracted from

True or false: GAAP requires companies to include in the notes FIFO values if LIFO is used and is significantly different.

true

Ending inventory errors in 2018 ___

will affect the 2019 goods available for sale but will not affect the 2019 ending inventory

Which of the following income statement line items are affected by the inventory method chosen?

- Income from operations - Gross profit - Income before income tax expense - Net income - Income tax expense

Which of the following would be found in a company that has an effective system of internal controls regarding inventory?

- Limit the access to inventory to authorized personnel only. - Inventory is stored in a protected area. - One employee is responsible for actual physical control over inventory while a different employee enters inventory information into the computer.

Which of these might cause the value of inventory to fall below its original cost?

- Obsolescence from going out of style - Damage - Increased competition

Assuming sales remain unchanged, if Cost of Goods Sold increases then

Gross Profit decreases

Which of the following statements are true?

- Using a different inventory accounting method leads to reporting a different amount for cost of goods sold. - Managers can choose the method of accounting for inventory cost (i.e., FIFO, LIFO, etc.) that best fits their business.