A201 chapter 7

Which of the following might an unethical manager, whose compensation is tied to profits, do that is not in the owners' best interest?

- Use FIFO even though prices are rising. - Minimize the inventory write-downs even though items are obsolete.

Accounting rules require a company to ______.

- consistently use the same inventory accounting method over time - justify any changes in inventory accounting methods

The Lower of Cost or Net Realizable Value rule is based on the _______ constraint to avoid overstating assets and income.

conservatism

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

Cost of goods sold on the income statement equals ______

the number of units sold times their unit cost

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

FIFO

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received? Multiple choice question.

FIFO

How does this affect the inventory turnover ratio: Have parts inventory delivered daily by suppliers instead of weekly.

Increases

In a perpetual system, the __________ account is debited when a company purchases merchandise on account

Inventory

During a period of increasing inventory costs, the ________ method yields the highest reported cost of goods sold and the lowest net income on the income statement.

LIFO

During a period of increasing inventory costs, the _________ method yields the lowest income tax expense.

LIFO

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

Which of these would you expect to have the highest inventory turnover ratio?

McDonald's

How does this affect the inventory turnover ratio: Extend payments for inventory purchases from 15 days to 30 days.

No effect

Which inventory system requires that the Inventory account be updated when merchandise is purchased? Multiple choice question.

Perpetual system

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

assumptions that accountants make about the flow of inventory costs

The weighted average cost method uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

average; average

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 will ______ when sold.

become cost of goods sold on the income statement

A lower of cost or net realizable value adjusting entry is based on the ______.

conservatism constraint

The ________ prescribes that a company use the same accounting methods period after period so that financial statements are comparable across periods.

consistency concept

A ______ inventory turnover ratio may result in a reduction in storage and obsolescence costs as well as reduced borrowing. Multiple choice question.

higher

How does this affect the inventory turnover ratio: Shorten production process from 10 days to 8 days.

increase

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

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

the FIFO

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

the FIFO

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Bijoux Company has sales of $40,000, beginning inventory of $5,000, purchases of $25,000, and ending inventory of $7,000. The goods available for sale for the period equals ______. Multiple choice question.

$30,000 Reason: Goods available for sale equals $30,000 (= beginning inventory of $5,000 plus purchases of $25,000).

Cost of goods sold equation

BI+P-EI=CGS

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

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 2000=2100+x-500

In which of the following ways does a periodic system differ from a perpetual system?

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

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. - Income Tax Expense will be lower. - Gross Profit will be lower.

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

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

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

- FIFO - LIFO

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

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

Which of the following statements are true?

- 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.

Types of inventory systems

- Perpetual inventory system: inventory transactions are recorded directly in an inventory account 1. units and cost of beginning inventory 2. units and cost of each purchase 3. units and cost of the goods for each sale 4. units and cost of the goods on hand at any point in time - Periodic inventory system: no up-to-date record on inventory is maintained during the year an actual physical count of the goods remaining on hand is required at the END OF EACH PERIOD COGS equation is used to determine cogs

cost flow assumptions

- The choice of an inventory costing method is NOT based on the physical flow of goods - FIFO: assumes that the earliest goods purchased (first in) are the first goods sold, and the last goods purchased are left in ending inventory allocates the OLDEST unit costs to COGS and the NEWEST unit costs to ENDING INVENTORY - LIFO: assumes that the most recently purchased goods (last in) are sold first and the oldest units are left in ending inventory allocates the NEWEST unit costs to COGS and the OLDEST unit costs to ending inventory ***LIFO and FIFO cost flow assumptions are exact opposites***

In a perpetual system, the entry to record a purchase of merchandise on account includes a ______.

- credit to Accounts Payable - debit to Inventory

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

- decrease in stockholders' equity - decrease in assets

effects of FIFO v LIFO

- when unit costs are rising, LIFO produces lower net income and a lower inventory valuation than FIFO increasing costs= LIFO is used on the tax return because it normally results in lower income taxes - when unit costs are declining, LIFO produces higher net income and higher inventory valuation than FIFO decreasing costs= FIFO is used for both tax returns and financial statements

Rank in order, from highest (top) to lowest (bottom), the anticipated inventory turnover ratios for the following companies. Position 1 of 3 WalMart correct toggle button unavailable WalMart

1. Walmart 2. Tiffany and Co. 3. bath Iron Works (sells battleships to the US Government)

managers choice of inventory methods

1. net income effects (managers prefer to report higher earning for their companies) 2. income tax effects (managers prefer to pay the least amount of taxes allowed by law as late as possible (least-latest rule of thumb))

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 method might an unethical manager, whose compensation is tied to profits, use despite inventory costs consistently rising and despite not being in the owners' best interest? Multiple choice question.

FIFO

True or false: A company may choose the inventory method used. True false question.

True

True or false: Accounting rules allow companies to choose, from a variety of methods, the inventory method that best fits their business environment.

True

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

True

Berkley Company had Beginning inventory of $4,000 and Purchases of $20,000. If half of its inventory was sold, Berkley's goods available for sale for the period will ______. Multiple choice question.

be split between cost of goods sold and ending inventory

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, cost

When analyzing a company's inventory turnover ratio, it is more important and more meaningful to compare the ratio with ______.

prior years' ratios for the company

Under the lower of cost or net realizable value approach, market generally is defined as the net _______ value.

realizable

At the end of the accounting period, LIFO amounts of cost of goods sold and ending inventory ______.

tend to be different and thus companies that track the units on perpetual basis make an adjustment to convert to a periodic basis

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

lower of cost or market

On January 1, Gerhard Company has 100 units in beginning inventory. On January 3, the company purchases 500 units; on February 23, 800 units; and on March 19, 1,000 units. If the company sells 100 units on January 4, which units would be assumed to have been sold in a perpetual FIFO system versus a period FIFO system? Multiple choice question.

The units in beginning inventory would be assumed to have been sold under both methods.

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

The weighted average cost method uses the weighted average cost to calculate the value of ______.

Inventory and Cost of Goods Sold