ACCT 2001: Chapter 7 (Inventory & CGS)

Delta diamonds has 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500 2 purchased July 9, $550 ea. 2 purchased Sept 23, $600 ea. Using perpetual specific identification, its CGS is:

$550

If EI in Year 1 is misstated, then Year 1's ____ also must be misstated.

CGS

A company overstated its EI by $1,000 in Year 1. What will also be misstated in Year 1?

CGS will be understated; Gross profit will be overstated

Which method will result in the same CGS amount whether it is computed using periodic or perpetual inventory system?

FIFO

Barry Bees's CGS is $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals ___ days.

(800+1200)/2 = 1,000 10,000/1,000 = 10 365/10 = 36.5 days to sell

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

- an effect on the company's income statement - an effect on the BS

The goals of inventory managers include ____.

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

Which of these will require a credit to the inventory account in a perpetual inventory system?

- selling inventory for cash - selling inventory on account

What IS line items are affected by the inventory method?

-income before tax exp -income tax exp - net income - gross profit - income from op

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value (highest to lowest).

1) FIFO 2) WA 3) LIFO

Bijoux Company has sales of $40,000, beginning inventory of $5,000, purchases of $25,000, and ending inventory of $7,000. The cost of goods sold is:

5,000 + 25,000 - 7,000 = 23,000

T/F: An error in EI in Year 1 will cause EI in Year 2 to be misstated as well.

False

T/F: 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: LIFO, FIFO, & weighted average go not mimic the physical flow of goods

Which of these inventory accounting methods are acceptable under US GAAP? a) LIFO b) weighted average c) count and carry d) FIDO e) specific identification f) FIFO g) LUDO

a b e f

Using a perpetual inventory system, when a company records sale of merchandise, it must also record: a) CGS (on IS) b) an increase in inventory c) CGS (on BS) d) decrease in inventory

a & d

Which inventory accounts would one expect to see in the accounting records of a company that makes furniture? a) raw materials inventory b) finished goods inventory c) cost of sales inventory d) work in process inventory

a&b&d

Which of the following statements concerning inventory is correct? a) inventory is NOT reported as a current asset b) inventory IS reported as a current asset because it has been sold c) inventory is a current asset because it will be converted to cash within a year of the BS date d) inventory is a non-current asset bc it is held for sale in the ordinary course of business

c) inventory is a current asset because it will be converted to cash within a year of the BS date

Gross Profit equals _____. a) revenues - inventory b) BI + P - EI c) net sales - CGS d) revs - exps

c) net sales - CGS

Goods in transit are: a) always included in the buying company's inventory b) special equipment used by surveyors c) always included in the transportation company's inventory d) inventory items being transported from a seller to a buyer e) always included in the selling company's inventory

d) inventory items being transported from a seller to a buyer

Which of the following would be considered merchandise inventory? a) work in process b) CGS c) raw materials d) purchased finished goods

d) purchased finished goods

The journal entry to record a write-down of inventory from cost to its lower market value includes a ______.

debit to CGS, credit to Inventory

A company wrote down its inventory to lower the replacement value. the effect on its accounting equation includes:

decrease in assets and SE

Assuming sales remain unchanged if CGS increases then gross profit ____.

decreases

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

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

notes to the financial statements

FIFO uses the ____ cost for cost of goods sold on income statement and ____ cost for inventory on the balance sheet

oldest, newest

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

prior year's ratios for the company

Applying the lower of cost or market rule results in inventory being reported at the ___.

market value if lower than cost

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

Balance Sheet Income Statement

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

Some companies may sell fewer high cost goods OR more low cost goods.

T/F: Accounting rules allow companies to choose, from a variety of methods, the inventory method that best fits their business environment.

True

T/F: CGS may include the write-down of inventory to market even though the goods haven't been sold.

True

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

True

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

higher

What might cause the value of inventory to fall below original cost?

increased competition obsolescence from going out of style damage

The weighted average cost method uses the WA cost to calculate _____.

inventory & CGS