Chapter 7SB Homework

Acme, Inc. had cost of goods sold of $2,000. If beginning inventory was $2,100 and ending inventory was $500, Acme's purchases must have been $

400

Which of the following statements are true? (Check all that apply.)

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

Where is inventory located on the financial statements?

Balance sheet as a current asset

ABC Corp. sells a product for $1,000 cash that cost $600. The journal entry for this transaction using a perpetual inventory system includes a debit to ______.

Cash of $1,000 and a credit to Sales revenue of $1,000; a debit to Cost of goods sold of $600 and a credit to Inventory of $600

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

LIFO

Goods Available for Sale will ______ when sold.

become Cost of Goods Sold on the income statement

Using a perpetual system, the purchase of merchandise on account includes a ______. (Check all that apply.)

debit to Inventory; credit to Accounts Payable

Probes, Inc. wrote down its inventory to the lower net realizable value. The effect on Probes' accounting equation includes a(n) _______. (Check all that apply.)

decrease in stockholders' equity decrease in assets

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 ______. (Check all that apply.)

decrease net income decrease stockholders' equity decrease assets

If Cost of Goods Sold Increases, Gross Profit ________.

decreases

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

desirable; higher

Net sales revenue minus cost of goods sold is ______.

gross profit

Sales revenue equals the number of units sold multiplied by the sales _________ and cost of goods sold equals the same number of units sold multiplied by the unit ________.

price; costs

Under the lower of cost or net realizable value approach, market generally is defined as the net ________ value. (Enter one word per blank)

realizable

Inventory is expensed when ______.

sold

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

subtracted from

Who decides which of the many inventory accounting methods a company should use?

the company's management

Sales revenue on the income statement equals ______.

the number of units sold times the sales price

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 cost

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 current net realizable values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at ______.

$1,000

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 7 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 2 quilts remained unsold. If Mountain Made uses periodic weighted average cost, its Cost of Goods Sold for the month is ______.

$1,656

Delta Diamonds had 5 diamonds available for sale this year: June 1 - purchased 1 for $500; July 9 - purchased 2 for $550 each; and on September 23 - purchased 2 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its ending inventory is ______.

$2,200

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500; 2 purchased July 9 for $550 each; and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its Cost of Goods Sold is ______.

$600 it's sold first

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

Most companies report their lower of cost or net realizable value write-down expense as ______ even if the goods haven't been sold, because it's a necessary cost of carrying and (eventually) selling the goods.

Cost of Goods Sold

Which step must happen first when determining Cost of Goods Sold using a periodic inventory system?

Count the number of units on hand.

Which of these might cause the value of inventory to fall below its original cost? (Check all that apply.)

Damage Obsolescence from going out of style Increased competition

If a company's inventory costs are rising, ______ inventory costing method(s) typically results in a higher income tax expense.

FIFO

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

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs? (Check all that apply.)

FIFO; LIFO

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. List from top to bottom, in order of highest ending inventory to lowest ending inventory value.

FIFO; weighted average cost; LIFO

True or false: Companies that use a perpetual inventory system never need to do a physical count of inventory because in a perpetual system cost of goods sold and inventory are kept up-to-date every time a sale is recorded.

False

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

Which of the following income statement line items are affected by the inventory method chosen? (Select all that apply.)

Income from Operations Gross Profit Income Tax Expense Income before Income Tax Expense Net Income

In which of the following ways does a periodic system differ from a perpetual system? (Check all that apply.)

Inventory is not updated until the end of the accounting period in a periodic system; Cost of Goods Sold is not updated until the end of the accounting period in a periodic system.

Which of the following would be found in a company that has an effective system of internal controls regarding inventory? (Check all that apply.)

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; Limit the access to inventory to authorized personnel only.

The definition of inventory includes which of the following items? (Check all that apply.)

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

Which of the following statements are true? (Check all that apply.)

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

In a periodic system, for Cost of Goods Sold to be updated, which of the following must occur? (Check all that apply.)

Take a physical count of inventory; Compute Cost of Goods Sold sold by subtracting Ending Inventory from Goods Available for Sale.

In a perpetual inventory system, the journal entry to record the payment of cash for the shipping costs of purchased merchandise will cause ______.

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

True or false: Both the periodic and perpetual systems require a credit to Accounts Payable when inventory is purchased on account.

True

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

True

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record ______. (Check all that apply.)

a decrease in its inventory Cost of Goods Sold, which will be reported on the income statement

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

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

Boopsie Agin, the company's bookkeeper, recorded the purchase of merchandise on account with a debit to Cost of Goods Sold and a credit to Cash. As a result, ______. (Check all that apply.)

assets are understated stockholders' equity is understated liabilities are understated

FIFO, LIFO, and weighted average inventory costing methods are based on ______.

assumptions that accountants make about the flow of inventory costs

If Year 1 ending inventory is overstated by $1,000, then the Year 2 ______. (Check all that apply.)

goods available for sale will be overstated by $1,000; beginning inventory will be overstated by $1,000.

When costs to purchase inventory are falling, using LIFO leads to reporting ______ than FIFO.

higher inventory on the balance sheet

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

higher; lower

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ______ and inventory on its ______.

income statement; balance sheet

If cost of acquiring inventory is rising, LIFO will result in which of the following compared to FIFO? (Check all that apply.)

income tax will be lower; gross profit will be lower; cost of goods sold will be higher.

After each sale of merchandise to a customer, both Inventory and Cost of Goods Sold are ______.

kept to date in a perpetual system.

Which of the following applies when inventory values drop below their current book values at year end?

lower of cost or market

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

lower; higher

The specific identification method ______. (Check all that apply.)

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

A company had 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 ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be $5 ________ than if it had used LIFO. (Enter one word per blank.)

more

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

Using a perpetual inventory system, the effect on the accounting equation of purchasing merchandise on account includes a(n) ______. (Check all that apply.)

increase in liabilities increase in assets

In a perpetual system, the ________ account is debited when a company purchases merchandise on account. (Enter one word per blank.)

inventory

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using periodic weighted average cost, its inventory after the December 24 sale is ______.

$2,240

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

Alpha Company bought 75 units of inventory for $4 each and 25 units of inventory for $5 each. Alpha's weighted average cost per unit is ______.

$4.25

King Costume started the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 40 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. If King Costume uses LIFO periodic, its Cost of Goods Sold for the month is ______.

$510

Which inventory system records a change in the Inventory account every time goods are bought, sold or returned?

Perpetual

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

Perpetual System

Matches the expense of a particular item made with the sale of that item; Matches the expense of the first item purchased with sales; Matches the expense of the last items purchased with sales; Matches the average cost of each unit of inventory with sales

Specific Identification; FIFO; LIFO; Weighted Average

Which of these inventory accounting methods are acceptable under US GAAP? (Check all that apply.)

Specific Identification; FIFO; LIFO; Weighted Average

Inventory is a ________ asset because it normally is used or converted into cash within one year or the next operating cycle. (Enter only one word per blank.)

current

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

market value if lower than cost

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

newest; oldest

In a perpetual inventory system, the journal entry to record the payment of cash for the shipping costs of purchased merchandise will cause ______.

one asset to increase and another asset to decrease

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

overstated

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

periodic