ACCT 251 - Chapter 6

Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error a. immediately. b. at the end of the fiscal period. c. at the end of the month.

a. immediately.

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

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

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

a. increases liabilities d. increases assets

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

b. cost of goods sold. c. inventory.

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are a. paid by the supplier. b. included in Gerald's inventory. c. treated as a selling expense.

b. included in Gerald's inventory.

Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies. a. service b. merchandising c. intermediary d. manufacturing

b. merchandising

The specific identification method (select all that apply): a. is not an acceptable method of accounting b. would be beneficial to a company that makes fine jewelry c. would be beneficial to a company that makes inexpensive products with high sales volume d. matches each unit of inventory with its actual cost

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

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to: a. Cost of Goods Sold b. Purchases c. Inventory d. Raw Materials

c. Inventory

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: a. inventory b. gains and losses c. operating expenses d. revenue

a. inventory

Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs? a. Periodic inventory system b. Both periodic and perpetual c. inventory systems d. Perpetual inventory system

d. Perpetual inventory system

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method. a. actual cost b. weighted-average c. matching unit d. specific identification

d. specific identification

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

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

Gross Profit is a. Net Sales Revenue minus Cost of Goods Sold. b. Revenue minus Inventory. c. Beginning Inventory plus Purchases minus Ending Inventory. d. Revenue minus Expenses.

a. Net Sales Revenue minus Cost of Goods Sold.

Net sales revenue minus cost of goods sold is a. gross profit. b. operating income. c. net income. d. earnings before taxes.

a. gross profit.

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs a. incurred solely on the balance sheet date. b. that have not yet been incurred. c. incurred several years earlier.

c. incurred several years earlier.

The ______ method of valuing inventory was developed to avoid reporting inventory at an amount that is ______ than the benefits it can provide. a. lower of cost and sales revenue; smaller b. cost-benefit; greater c. lower of cost and net realizable value; greater d. lower of cost and sales revenue; greater e. lower of cost and net realizable value; smaller f. cost-benefit; smaller

c. lower of cost and net realizable value; greater

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following? a. Debit Inventory b. Debit Purchases c. Debit Accounts Payable d. Debit Sales Revenue

a. Debit Inventory

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

FIFO or first-in-first-out

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

LIFO or last-in-first-out

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

Merchandising, Merchant, Retail, Wholesale, or Merchandise

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. Sales Revenue c. Purchases d. Inventory

a. Cost of Goods Sold d. Inventory

Which of the following accounts would be found in the balance sheet of a manufacturing company? a. Cost of goods sold b. Merchandise inventory c. Work in process

c. Work in process

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 $700; credit Net Income $300; credit Service Revenues $1,000 b. Debit Cost of Goods Sold $700; credit Inventory $700 c. Debit Cost of Goods Sold $1,000; credit Inventory $1,000 d. Debit Accounts Receivable $1,000; credit Sales Revenue $1,000

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

Which inventory cost flow method approximates the physical flow of inventory items? a. Weighted-average cost b. FIFO c. LIFO

b. FIFO

The shipping term FOB stands for a. freight over board. b. free on board. c. free onto buyer. d. freight on board.

b. free on board.

The lower of cost and net realizable value method was developed to a. provide an alternative to the FIFO, LIFO, and weighted-average methods. b. prevent the company from selling the inventory below its original cost. c. avoid reporting inventory at an amount that exceeds the benefits it provides.

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

A periodic inventory system measures cost of goods sold by a. estimating the amount of inventory sold. b. debiting cost of goods sold for all purchases of inventory. c. counting inventory at the end of the period. d. making entries to the inventory account for each purchase and sale.

c. counting inventory at the end of the period.

Where is inventory reported in the financial statements? a. Balance sheet as a noncurrent asset b. Statement of cash flows as an investing activity c. Income statement as revenue d. Balance sheet as a current asset

d. Balance sheet as a current asset

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

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

In a perpetual inventory system, when a company sells inventory on account, how many entries are required? a. Zero b. One c. Three d. Two

d. Two

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

inventory or inventories

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, smaller, or less

Companies that produce the inventory they sell are referred to as ____ . (Enter one word per blank)

manufacturers or manufacturing

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

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

Accounting errors must be corrected a. as soon as they are discovered. b. at the end of the year. c. at the end of the accounting period.

a. as soon as they are discovered.

FOB shipping point means title to the goods passes a. when they are shipped. b. when they arrive at the destination.

a. when they are shipped.

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

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

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income? a. Weighted-average b. LIFO c. FIFO

b. LIFO

When prices rise, which inventory method tends to result in lower income and a lower tax liability? a. Weighted-average cost b. LIFO c. NIFO d. FIFO

b. LIFO

What type of company purchases raw materials and makes goods to sell? a. Wholesalers b. Manufacturers c. Retailers

b. Manufacturers

Inventory is classified as a. a revenue. b. a current asset. c. a noncurrent asset. d. a current liability.

b. a current asset.

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

b. assets will increase.

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are a. Deducted from Ronald's inventory. b. treated as a selling expense. c. paid by the supplier.

c. paid by the supplier

Fill in the blanks to complete the sentence. 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, greater, more, or larger