Accounting Chapter 6 Learn Smart

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

Last-In-First-Out

When prices increase, the _______ inventory method tends to decrease a company's tax liability during a particular fiscal period.

Last-In-First-Out

Periodic inventory system

Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

Periodic inventory system

Sherman Company recognizes cost of goods sold after completing a physical inventory.

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

Which of the following companies would be most likely to utilize the specific identification method?

Adams Company produces one-of-a-kind products.

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 which of the following?

Debit Inventory

Which inventory cost flow method approximates the physical flow of inventory items?

FIFO

Bernie Corp. uses the FIFO inventory method to calculate cost of goods sold for financial reporting purposes. Which of the following methods can Bernie use for tax purposes?

FIFO and weighted-average only

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

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

LIFO reserve

Meller purchases inventory on account. As a results, Meller's

assets will increase.

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

incurred several years earlier.

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming

outdated

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

two

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

multiple-step

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Freight-in is

included as a cost of inventory.

Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.

merchandising

Raw materials, direct labor, and manufacturing _______ are the three costs related to the manufacturing of products.

overhead

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

paid by the supplier

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.

specific identification

FOB destination means title to the goods passes

when they arrive at the destination

The specific identification method (select all that apply):

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

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

FIFO

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

Inventory Cost of Goods Sold

The definition of inventory includes which of the following items?

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

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

Manufacturers

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

Perpetual inventory system

Peter Company recognizes cost of goods sold each time it recognizes a sale.

LIFO

Provides better matching of current revenues with current inventory cost

Which of the following costs are recognized in work in process for a manufacturing company?

Raw materials Direct labor Overhead

Which of the following accounts would be found in the balance sheet of a manufacturing company?

Work in process

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

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

Inventory is classified as

current asset

The shipping term FOB stands for

free on board.

Net sales revenue minus cost of goods sold is

gross profit.

Items held for sale in the normal course of business are referred to as ______.

inventory

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.)

inventory cost of goods sold

The _____ _______ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

inventory turnover

Companies that produce the inventory they sell are referred to as _________ .

Manufacturers

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

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

LIFO

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the ------ ------.

lifo reserve

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

lower of cost and net realizable value; greater

The _____ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

FIFO

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

LIFO

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO

______ companies purchase inventory that is primarily in finished form and ready for resale to customers.

Merchandise

FIFO

Most closely approximates the actual physical flow of inventory

Perpetual inventory system

Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

Under a perpetual inventory system, the entry to record the return of goods previously purchased on account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is:

correct

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

If a company uses a perpetual inventory system, the entry to record the company's return of goods previously purchased on account includes ______ and _____. (Answer from the viewpoint of the buyer.)

credit to Inventory. debit to Accounts Payable

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory.

A multiple-step income statement reports multiple levels of ______

income

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 increases liabilities

A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:

inventory

Freight-in on inventory purchases is typically recognized as

part of the cost of purchasing inventory.

A company is most likely to utilize the specific identification method if its inventory consists of

very expensive products. unique products.

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

Finished goods Work in process Raw materials

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.