ACCT 2301 Chapter 6

Select all that apply Which of the following methods are not used for inventory costing? (Select all that apply.) a. NIFO b. LIFO c. Simple-average d. Specific identification e. Weighted-average f. FIFO

a. NIFO c. Simple-average

Meller purchases inventory on account. As a results, Meller's: a. assets will increase. b. liabilities will decrease. c. stockholders' equity will decrease. d. income will decrease.

a. assets will increase.

Select all that apply Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.) Multiple select question. a. current assets. b. inventory. c. cost of goods sold. d. liabilities.

c. inventory d. cost of goods

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error _______

immediately

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

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

Companies that produce the inventory they sell are referred to as ______

manufacturers

Select all that apply The definition of inventory includes which of the following items? Multiple select question. a. Items currently in production for future sale b. Items held for resale c. Materials used currently in the production of goods to be sold d. Items held for use or disposal

a. Items currently in production for future sale b. Items held for resale c. Materials used currently in the production of goods to be sold

Select all that apply Which of the following methods are available for costing inventory? (Select all that apply.) a. Specific identification b. LIFO c. FIFO d. NIFO e. Weighted-average f. Simple-average

a. Specific identification b. LIFO c. FIFO e. Weighted-average

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

Inventory

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

Debit Inventory

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

FIFO

For internal record keeping, most companies carry their inventory using the _____ basis.

FIFO

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

Match the inventory cost flow assumptions on the left with the scenario on the right.

FIFO - Most closely approximates the actual physical flow of inventory LIFO - Provides better matching of current revenues with current inventory cost

The shipping term FOB stands for

Free On Board

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

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

LIFO

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

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

Manufacturers

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

Kilian Company's inventory balance at the end of the current year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements in the following year will be:

Overstated net income

Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs?

Perpetual inventory system

Match each scenario with the type of inventory system.

Perpetual inventory system - Neumann Company can determine the cost of inventory still on hand by referring to the inventory account. Periodic inventory system - Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

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

Two Reason: Two entries are required: One entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory.

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

Work in process

Select all that apply Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods. a. Cost of Goods Sold b. Inventory c. Purchases d. Sales Revenue

a. Cost of Goods Sold b. Inventory

Select all that apply Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to: a. decrease an asset and increase an expense b. decrease an asset and decrease revenue c. increase an asset and increase revenue d. increase an asset and decrease an expense

a. decrease an asset and increase an expense c. increase an asset and increase revenue

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

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

Select all that apply Purchasing inventory on account: a. increases equity b. increases assets c. decreases assets d. decreases equity e. increases liabilities

b. increases assets e. increases liabilities

Select all that apply What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory) a. total assets decrease b. stockholders' equity increases c. net income increases d. total assets increase e. stockholders' equity decreases

b. stockholders' equity increases c. net income increases d. total assets increase

Inventory is classified as

current asset

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

incurred several years earlier.

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

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

old

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

paid by supplier

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

Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the financial statement effect in the current year will be:

understated assets, retained earnings, and net income

FOB shipping point means title to the goods passes

when they are shipped.

FOB destination means title to the goods passes

when they arrive at the destination.

Accounting errors must be corrected

as soon as they are discovered.

Select all that apply Which of the following represent reasons why managers closely monitor inventory levels? a. To minimize costs of inventory write-downs due to obsolete inventory. b. To increase the average days in inventory. c. To ensure that sufficient units are available.

a. To minimize costs of inventory write-downs due to obsolete inventory. c. To ensure that sufficient units are available.

Select all that apply Which of the following accounts are typically reported in the balance sheet of a manufacturing company? a. Work in process b. Raw materials c. Finished goods d. Cost of goods sold

a. Work in process b. Raw materials c. Finished goods

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? a. Debit Cost of Goods Sold $1,500; credit Sales Revenue $1,500 b. Debit Accounts Receivable $2,000; credit Inventory $2,000 c. Debit Cost of Goods Sold $1,500; credit Inventory $1,500 d. Debit Inventory $1,500; credit Cost of Goods Sold $1,500

c. Debit Cost of Goods Sold $1,500; credit Inventory $1,500

Select all that apply Using the perpetual inventory system, what is the effect of a sale of inventory on assets? a. assets decrease by the sales price of the inventory b. assets increase by the cost of the inventory c. assets increase by the sales price of the inventory d. assets decrease by the cost of the inventory

c. assets increase by the sales price of the inventory d. assets decrease by the cost of the inventory

Select all that apply 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? a. Debit Cost of Goods Sold $1,000; credit Inventory $1,000 b. Debit Cost of Goods Sold $700; credit Net c. Income $300; credit Service Revenues $1,000 d. Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 e. Debit Cost of Goods Sold $700; credit Inventory $700

d. Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 e. Debit Cost of Goods Sold $700; credit Inventory $700