Accounting chapter 7 learn smart

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.

Companies generally report their accounting method for inventory in the ______.

notes to the financial statements

T/F Specific identification, weighted average cost, LIFO and FIFO are acceptable GAAP costing methods.

True

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

Which of the following would be considered merchandise inventory?

Purchased finished goods

What may cause inventory turnover ratios to vary significantly between companies in the same industry?

Some companies may sell more lower-cost goods. Some companies may sell fewer higher-cost goods.

Which inventory method is typically used when accounting for expensive and unique inventory items?

Specific identification

______ inventory will enter the production process and become ______ inventory. Once complete, the goods will become ______ inventory.

Raw materials; work in process; finished goods

The costs of carrying inventory include the costs of ______.

obsolescence theft spoilage storage

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, the 3 goods sold are assumed to be ______.

from the beginning inventory

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchased 3 more at $12 each. What is the weighted average cost per unit?

$11.20

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, Cost of Goods Sold equals ______.

$33

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

Damage Obsolescence from going out of style Increased competition

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

FIFO

What inventory accounts would one expect to see in the accounting records of a company that makes furniture?

Finished goods inventory Raw materials inventory Work in process inventory

Applying the lower of cost or market 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

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

FIFO LIFO

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

The goals of inventory managers include ______.

keeping the costs of buying and storing inventory as low as possible making sure that inventory quality meets customer expectations having enough inventory on hand to meet customer demand

Acme Company's balance sheet shows three inventory accounts—raw materials, work in process, and finished goods. Acme Company must be a ______.

manufacturer

To find a description of the inventory accounting method used by a company, you need to look at the ______.

notes to the financial statements

True or false: The inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP.

True

Days to sell measures the average number of ______.

days from the time inventory is purchased to the time it is sold

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

decrease in stockholders' equity decrease in assets

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

decreases

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, the 3 goods sold are ______.

from the purchases made during the month

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

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

higher

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.

higher

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

higher Inventory on the balance sheet

If a company were to ignore the fact that the market value of its inventory is lower than its cost, then ______.

its assets and stockholders' equity would be overstated

A company had beginning inventory of 3 units that cost $5 each. During the month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be ______.

lower using FIFO, leading to higher gross profit and higher income taxes

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

$1,000 Reason: The lower-of-cost-or-market rule requires the DyeZ boxes be recorded at the lower market value of $8 instead of the higher cost of $10. Thus, Inventory equals $1,000 (=(200 bottles x $1) + (100 boxes x $8)).

_________- inventory consists of products acquired in a finished condition, ready for sale without further processing.

Merchandise

Gross Profit equals ______.

Net Sales minus Cost of Goods Sold

Blog Inc., has net sales of $50,000, cost of goods sold of $30,000, and selling expenses of $5,000. Its gross profit is ______.

$20,000 Reason: Gross profit = sales-cost of goods sold.

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

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

Inventory is reported as a(n) ______.

current asset on the balance sheet

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 inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

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: Specific identification is an inventory method typically used when accounting for expensive and unique inventory items.

true

Barrry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals _____ days (assume 365 days per year).

36.5 or 37 (COGS/Average Inventory)= inventory turnover ratio 365/inventory turnover ratio= days to sell

If you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

FIFO

Which of the following statements concerning inventory is correct?

Inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date.

Delta Diamonds had 5 one-carat 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 one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, Cost of Goods Sold equals ______.

$30

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

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 Cost of Goods Sold is ______.

$560 Reason: Cost of Goods Sold (using weighted average)=($500 + (2 x $550) + (2 x $600))/(1 + 2 + 2)=$560 per unit; $560 x 1 unit=$560

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

if Barry Bees, Inc.'s days to sell equals 73 days based on a 365-day year, then its inventory turnover ratio equals _____ times.

5

Which company is most likely to have a higher inventory turnover than its competitors within the same industry?

A company with lower-priced goods and lower gross profit

Which of these would explain an increase in a company's inventory turnover ratio?

A decrease in total inventory An increase in the demand for the company's products

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

Which financial statements are needed to calculate the inventory turnover ratio?

Income statement Balance sheet

Which of the following may occur with a higher inventory turnover ratio?

Reduction in obsolescence Reduction in inventory storage costs

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

The company's management

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

an effect on the company's balance sheet an effect on the company's income statement

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

Berkley Company had beginning inventory of $4,000 and purchases of $20,000. If half of its inventory is sold, Berkley's total goods available for sale for the period will ______.

be split between cost of goods sold and ending inventory

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

When using the specific identification inventory method, cost of goods sold equals the ______.

cost of the actual item sold

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 Reason: The average cost per unit is $560 (=($500 + (2 x $550) + (2 x $600))/(1 + 2 + 2)). Inventory (using weighted average) is $2,240 ($560 per unit x 4 units).

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.

Which statement are true?

-The inventory methods apply to both perpetual and periodic inventory systems. -The inventory costing methods determine the amount of the debit to Cost of Goods Sold and credit to Inventory. -Specific identification, weighted average cost, LIFO and FIFO are generally accepted costing methods.

If you had 1 unit that cost $3 in beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

FIFO Reason: FIFO would assume the $3 and $2 units were sold making CGS $5. LIFO would assume the $1 and $2 units were sold making CGS only $3.

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

rue or false: GAAP requires that a business must use an inventory accounting method that is the same as the physical flow of goods in and out of the business.

False

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

If a company assumes that its inventory costs flow out in the opposite order from which the goods were purchased, it uses _____ to value its inventory

LIFO

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

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

LIFO FIFO

In times of rising prices, why would a company choose LIFO over FIFO?

LIFO would result in a higher Cost of Goods Sold making the Income Tax Expense lower than FIFO.