Principles of Accounting Ch 6

For the year, Sealy Incorporated reports net sales of $50,000, cost of goods sold of $40,000, and an average inventory balance of $5,000. What is Sealy's inventory turnover ratio?

$40,000/$5,000=8

At the beginning of the year, Bennett Supply has inventory of $3,500. During the year, the company purchases an additional $12,000 of inventory. Cost of goods sold for the year is $11,500. What amount will Bennett report for inventory?

($3,500+$12,000)-$11,500=$4,000

At the beginning of the year, Johnson Supply has inventory of $5,200. During the year, the company purchases an additional $20,000 of inventory. An inventory count at the end of the year reveals remaining inventory of $3,000. What amount will Bennett report for cost of goods sold?

($5,200+$20,000)-$3,000=$22,200

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

-inventory -cost of goods sold

What best describes a merchandising company?

A company that purchases products that are primarily in finished form for resale to customers.

At the end of a reporting period, Gaston Corporation determines that its ending inventory has a cost of $6,500 and a net realizable value of $5,800. The adjusting entry to write down inventory to net realizable value would include:

A credit to inventory for $700 and a debit to cost of goods sold expense for $700

What is the multi-step income statement?

An income statement that reports multiple levels of income (or profitability)

Under a perpetual inventory system...

Cost of goods sold is recorded with each sale.

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

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 what?

Debit Inventory

Using a perpetual inventory system, the purchase of inventory on account would be recorded as...

Debit Inventory; credit Accounts Payable.

At the end of the year, Marline Corporation determines that its ending inventory has a cost of $2,000 and a net realizable value of $1,900. What would be the effect of the adjusting entry to write down inventory to net realizable value?

Decrease in net income.

When a company determines that the net realizable value of its ending inventory is lower than its cost, what would be the effect(s) of the adjusting entry to write down inventory to net realizable value?

Decrease total assets. Decrease net income. Decrease retained earnings.

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

FIFO

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

FIFO

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

FIFO

Which cost flow assumption generally results in the highest reported amount of net income in periods of rising inventory costs?

FIFO

Which inventory cost flow assumption generally results in the lowest reported amount for cost of goods sold when inventory costs are rising?

FIFO

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

Inventory and cost of Goods Sold

What is the weighted cost average method?

Inventory costing method that assumes both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale

What is the specific identification method?

Inventory costing method that matches or identifies each unit of inventory with its actual cost

What is a perpetual inventory system?

Inventory system that maintains a continual record of inventory purchased and sold.

What is a periodic inventory system?

Inventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand

What is inventory?

Items a company intends for sale to customers in the ordinary course of business.

The definition of inventory includes which of the following items? Items held for resale Items held for use or disposal Items currently in production for future sale Materials used currently in the production of goods to be sold

Items held for resale Items currently in production for future sale Materials 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

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

LIFO

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

LIFO

What inventory method provides the best matching of revenues and expenses when prices increase?

LIFO

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

LIFO

Which cost flow assumption must be used for financial reporting if it is also used for tax reporting?

LIFO

Which inventory cost flow assumption generally results in the lowest reported amount for inventory when inventory costs are rising?

LIFO

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

LIFO

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

LIFO reserve

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

Manufacturers

Which of the following inventory systems requires a physical count in order to determine cost of goods sold?

Periodic inventory system

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

Perpetual inventory system

A multiple-step income statement provides the advantage of:

Separating revenues and expenses based on their different types of activities.

What are raw materials?

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

What is the inventory turnover ratio?

The number of times a firm sells its average inventory balance during a reporting period (year). It equals the cost of goods sold divided by the average inventory.

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.

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

Work in process, raw materials, and finished goods

What is inventory classified as?

a current asset

The entry to write down inventory from cost to net realizable value at the end of the year includes a debit to what and a credit to what?

a debit to Cost of Goods Sold and a credit to Inventory

Fan Company sells inventory on account. What would the entry or entries to record this sale using a perpetual inventory system include?

a debit to accounts receivable and a credit to sales revenue; a debit to cost of goods sold and a credit to inventory

What is net income?

all revenues minus all expenses

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

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

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

Fan Company purchases inventory on account. The entry to record this purchase using a perpetual inventory system would include a debit to what and a credit to what?

debit inventory and credit accounts payable

What is the FIFO method?

first in first out - Inventory costing method that assumes the first units purchased (first in) are the first ones sold (first out)

The shipping term FOB stands for

free on board

What level of profitability in a multiple-step income statement best represents profitability directly related to the sale of inventory?

gross profit

What is operating income?

gross profit minus operating expenses

What is gross profit ratio?

gross profit ratio (gross profit ÷ sales x 100): It is always written as a percentage. It allows the business to assess the relationship between revenue earned and the cost of goods. A business wants to maximise their gross profit ratio. Measure of the amount by which the sale of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales

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

Where is inventory reported in the financial statements?

in the balance sheet as a current asset

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

Purchasing inventory on account:

increases assets and increases liabilities

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

Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because:

inventory costs generally change over time.

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

lower

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

lower

The Blank______ method of valuing inventory was developed to avoid reporting inventory at an amount that is Blank______ than the benefits it can provide.

lower of cost and net realizable value; greater

What are companies that produce the inventory they sell referred to as?

manufacturers

What companies record revenues when selling inventory?

manufacturing and merchandising companies.

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a(n) __________ income statement

multi-step

What level of profitability in a multiple-step income statement best represents profitability from primary activities of the company?

operating income

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

paid by the supplier.

What is gross profit?

sales revenue minus cost of goods sold

What are freight charges?

shipping or delivery charges associated with inventory for most merchandising companies

What is the cost of goods sold?

the cost of the inventory that was sold during the period (year)

What does FOB destination mean?

the title passes when the inventory reaches the buyer's destination

What does FOB shipping mean?

the title passes when the seller ships the inventory

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

two

FOB destination means title to the goods passes

when they arrive at the destination.