ACCT 1 E1 SmartBook

Perpetual Purchase Discount

A/P ----Inventory

Perpetual Return Purchased Inventory

A/P ----Inventory

Periodic Purchase Discount

A/P ----Purchase Discount

Periodic Return Purchased Inventory

A/P ----Purchase Returns

Which factors may influence a company's choice of inventory cost flow assumption?

Actual physical flow of inventory Tax implications of choice Financial statement effect

Amber is in charge of preparing an annual budget for her company. As part of the budgeting process, she must estimate cost of goods sold and ending inventory. Which of the following statements is correct regarding the use of the gross profit method?

Amber may utilize the gross profit method to estimate ending inventory and cost of goods sold.

Inventory is _____.

An asset

Which of the following likely will lead to revenue recognition at a point in time? (Select all that apply.)

Buyer has accepted the asset Buyer has legal title to the asset

Which of the following is correct regarding changes in accounting methods?

Changes are permitted if they are made in response to changes in the company's business environment.

Perpetual Sell Inventory

Cogs ----Inventory

Year End LIFO Reserve Adjusting Entry

Cogs ----LIFO Reserve

CIP - Billings = ?

Contract asset/liability

The concept or principle that states that companies should recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for goods and services is referred to as the:

Core revenue recognition principle

Cost flow _____ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory

assumptions

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____.

at the end of the period; each time goods are sold

Which inventory costing method assumes that items sold are those that were acquired first?

FIFO

Many companies maintain their internal records using _____ or the average cost method, but use ______ for external reporting and income tax purposes

FIFO; LIFO

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

avoid reporting inventory at an amount that exceeds the cash it can provide

The measurement of inventory and cost of goods sold starts with determining the physical quantities of goods in which of the following systems?

both the periodic and perpetual inventory system

Which of the following services are commonly performed over time? (Select all that apply.)

Financial statement audits Lending of money Consulting engagements

Accounting principles should be applied consistently because this practice enhances

Financial statement comparability

Identify the situations for which ending inventory and cost of goods sold may be estimated utilizing the gross profit method.

For interim reporting periods. When inventory was lost, destroyed, or stolen. To determine reasonableness of inventory amounts during an audit.

Periodic Freight Cost

Freight In ----Cash

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

What method(s) can be used to estimate progress toward completion for the purpose of recognizing revenue over time? (Select all that apply.)

Input method Output method

Perpetual Purchase Inventory

Inventory ----A/P

Perpetual Freight Cost

Inventory ----Cash

Perpetual Inventory Returned by Customer

Inventory ----Cogs

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

LIFO

Which inventory costing method assumes that the units sold are the most recent units purchased?

LIFO

LCNRV =

Lower of Cost or NRV

The goods a wholesale company purchases in finished form are referred to as what?

Merchandise inventory

Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory.

Mouse pads

Munch Inc. delivers various types of construction materials to a customer's building site. Over an 18-month period, Munch's employees utilize Munch's machinery and tools to construct a new office building for the customer. Munch identifies only one performance obligation related to this contract because

Munch combines the materials, labor, and use of machinery and tools to construct a single complete building

Floor =

NRV - Normal Profit

What is included in the cost of merchandise inventory?

Necessary costs incurred to get the goods in location for sale. The purchase price of the goods.

Does Conventional Retail Inventory Method include markdowns?

No

Does LIFO Retail Method include beginning inventory?

No

Journal entries for periodic inventory sale and inventory return

No JE

Periodic Inventory Returned by Customer

No JE

Periodic Sell Inventory

No JE

Overstated A/R results in _____ sales revenue

Overstated

Which of the following are disadvantages of unit LIFO?

Possibility of LIFO liquidation Significant record keeping costs

Periodic Purchase Inventory

Purchases ----A/P

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

Raw materials Finished goods Work in process

Goods or services that are not distinct are ____ and treated as a ____ performance obligation

combined; single

Ceiling (NRV) =

Selling Price - Cost

In applying the lower of cost or market rule, market value

Should not be less than net realizable value less normal profit margin Should not be greater than net realizable value

What method of inventory valuation matches each unit on hand at the end of the period with its actual cost?

Specific identification

For financial reporting, the lower of cost or net realizable value approach can be applied to

The entire inventory. Groups of inventory items. Individual inventory items.

What of the following could motivate a company that uses LIFO for external reporting to use another method for internal record keeping?

The high record keeping cost of LIFO. Contractual agreements such as bonus contracts.

The lower of cost and net realizable value rule causes income to be reduced in the period when

The inventory value declines below cost

Which statements are true regarding revenue recognition over time and upon completion?

The same total amount of gross profit is recognized under both methods. Revenue recognition over time provides a more realistic measure of a project's periodic performance.

Which statements are true regarding revenue recognition over time and upon completion? (Select all that apply.)

The same total amount of gross profit is recognized under both methods. Revenue recognition over time provides a more realistic measure of a project's periodic performance.

Which of the following differs between revenue recognized over time and revenue recognized at completion?

The timing of recognition

Which of the following is correct?

There is no requirement to choose a cost flow assumption that approximates actual physical flow of units

Which of the following will not differ between revenue recognized over time and revenue recognized at completion? (Select all that apply.)

Total expense Total profit Total revenue

An extended warranty provides protection beyond the manufacturer's quality-assurance warranty

True

Gross method is in order of operations

True

Liquidation means you sold more than you had to begin with.

True

Net method is all done at once

True

Periodic is done at end and is specific

True

Perpetual is done in order and is vague

True

The impact on reported income numbers is an important consideration when choosing an inventory cost flow method.

True

High record keeping costs and possible LIFO liquidation are disadvantages of

Unit LIFO

The specific identification method:

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

Does AVG Cost Retail Inventory Method include markdowns?

Yes

The average cost method assumes that cost of goods sold consists of

a mixture of all the goods available for sale

In a perpetual inventory system the inventory account is

continually adjusted

Ending inventory plus cost of goods sold equals

cost of goods available for sale

Inventory Turnover Ratio

cost of goods sold/average inventory

Long-term contracts require careful consideration in identifying performance obligations because these type of contracts typically include many products and services that

could be viewed as separate performance obligations

The retail inventory method tends to be more accurate than the gross profit method because it relies on the

current relationship between cost and selling prices

Merger Company applies the lower of cost and net realizable value rule to individual inventory items. If the company were to apply the rule to the entire inventory balance, the chance of recording an inventory loss would

decrease

For a promise to provide a good or service to be accounted for as a separate performance obligation, the good or service must be:

distinct from other goods and services in the contract

The gross profit method is useful in situations where _____ of inventory are desirable

estimates

The amount of cost of goods sold determined under the average cost method typically

falls between the amounts determined using LIFO and FIFO

Gross Profit Ratio

gross profit/net sales or (net sales - cogs)/net sales

For contracts with multiple performance obligations, the seller allocates the transaction price to each performance obligation

in proportion to the stand-alone selling price of each good or service in the contract

5 Steps to Revenue Recognition

1. Identify the contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) each performance obligation is satisfied

Methods that can be used to estimate progress toward completion are referred to as _____ based and _____ based methods

input or input

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

inventory

Finished goods is a type of inventory found on a _____ company's balance sheet.

manufacturing

Inventory for a _____ company consists of raw materials, work in process, and finished goods.

manufacturing

Ruy Company typically tries to sell its oldest inventory items first. Ruy Company

may choose any of the three accepted inventory methods.

In a periodic inventory system, the inventory account is _____ and cost of goods sold is recorded _____

not adjusted as purchases and sales are made; at the end of the reporting period

Revenue recognition for services such as lending money and performing financial statement audits is typically

over time

Overstated inventory results in _____ profits

overstated

Understated depreciation expense results in _____ profits and assets

overstated

To use the _____ method, a company must maintain records of inventory and purchases at cost and at current selling price

retail inventory

The inflow of cash or other assets that a business receives when it provides goods or services to customers is referred to as

revenues

Kunze Company sells bundled products to a customer and correctly identifies several separate performance obligations. Kunze should allocate the total contract price in proportion of each obligation's

stand-alone selling price

The amount at which a good or service is sold separately under similar circumstances is referred to as the

stand-alone selling price

A DVL pool is made up of items

that are likely to have similar cost change pressures.

The LIFO inventory method assumes that the units sold are

the most recent units purchased

Arthur Inc. provides services to consulting clients. Arthur should recognize the related revenue when

the related performance obligation is satisfied

As compared to revenue recognition over time, the total amount of gross profit recognized related to revenue upon completion is:

the same

A long-term contract that includes many products and services that are capable of being distinct, may be accounted for as a single performance obligation because

the seller's role is to combine those products and services prior to delivery or completion

The _____ price is the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services

transaction

The amount the seller expects to be entitled to receive from the customer in exchange for providing goods or services is referred to as the

transaction price

The core revenue recognition principle stipulates that companies recognize revenue when goods or services are

transferred to customers

Understated inventory results in _____ profits

understated

Recording period expense as a prepaid expense results in _____ expenses, and _____ profits

understated; overstated

Understated A/P results in _____ expenses and _____ net income

understated; overstated

When a company determines the quantity of inventory items, it must consider

units on consignment. units it currently possesses. units in transit.

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

work in process

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $106. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$100 (Because the ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $106. Market is the middle of these three values so = $104 compared to cost of $100. Cost is lower so record at cost)

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost exceeds net realizable value by $20 Item B: cost is $10 lower than net realizable value Item C, cost is $5 lower than net realizable value. If Linden applies the rule to individual items, it should recognize a loss of

$20 (Because when applying the rule to individual items, only item A has a market value below cost so a $20 loss is recorded)

Linden Company has three inventory items. Utilizing the lower of cost and net realizable value rule, Linden determines the following: Item A: cost is $40; net realizable value is $20 Item B, cost is $10; net realizable value is $20 Item C, cost is $5; net realizable value is $10 If Linden applies the rule to its entire inventory, it should recognize a loss of

$5 (Because item A has a cost higher than net realizable value and B and C have a cost lower than NRV. -$20 + $10 + $5 = $5 loss. Total cost is $55, total NRV is $50)

Smith Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $6. The normal gross profit ratio is 20% of selling price. The replacement cost of the inventory is $95. Smith Company uses the LIFO inventory method so must use the lower of cost or market approach and this inventory item should be valued at

$95 (Because the ceiling is NRV = $110 - 6 = $104. Floor is NRV less normal profit of 20% so $104 - 22 = $82. Replacement cost is $95. Market is the middle of these three values so = $95 compared to cost of $100. Market is lower so record at market)

Feather Company's inventory is recorded at its historical cost of $100,000. The replacement cost currently is $95,000; estimated selling price is $102,000; estimated selling cost is $5,000; normal profit is $10,000. The estimated net realizable value of the inventory is

$97,000 ($102,000 - $5,000)

Jones Company's inventory cost is $100. The expected sales price is $110, estimated selling costs are $12. Consistent with the lower of cost and net realizable value approach, this inventory item should be valued at

$98 (because $110 - $12 and is lower than cost)

What 3 items do we choose from for the middle cost for LCM?

Cost, Floor, Replacement

Which of the following are key indicators that control of goods or services has been transferred to the customer? (Select all that apply.)

Customer has an obligation to pay Customer has legal title to the asset Customer accepted the risks and rewards of ownership

What is the first step in measuring inventory and cost of goods sold?

Determining the physical quantities of goods

A periodic inventory system (Select all that apply.)

Does not continuously track the quantity of merchandise. Does not continuously track the cost of merchandise sold.

Which of the following are estimated when using the gross profit method?

Ending inventory Cost of goods sold

What type of expenditures should be included in the cost of inventory of a manufacturing company?

Expenditures necessary to bring inventory to sales location Expenditures necessary to acquire inventory

The cost of inventory includes (Select all that apply.)

Expenditures to acquire the inventory The cost to bring inventory to its desired location The cost to bring inventory to its desired condition

Recording revenue before it's earned results in _____ revenue and net income, and _____ liabilities

overstated; understated

The essential difference between revenue recognition over time and upon completion relates to the

pattern of recognition of the related gross profit

Which inventory system allocates cost of goods available for sale only at the end of each reporting period?

periodic inventory system

A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs.

perpetual; perpetual

Under the LCM approach, market generally is defined as ______ cost

replacement

The lower of cost or market approach is _____ for companies that use _____.

required under GAAP; LIFO or the retail inventory