ch 6

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

FIFO

Purchasing inventory on account:

increases liabilities increases assets

When a sale occurs under the periodic inventory system, we record:

only the sale, but not the related cost of goods sold

Cost of goods sold:

Cost of the inventory that was sold during the period. -an expense

Which of the following methods are not used for inventory costing?

NIFO Simple-average

Merchandising Companies

companies that sell products that someone else has manufactured

If a company uses the periodic inventory system, how many entries are made when a sale occurs?

one

Retailers

purchase inventory from manufacturers or wholesalers and then sell this inventory to end users.

In a perpetual inventory system, when inventory is purchased, the _________ account is debited, whereas in a periodic system, the ___________ account is debited.

inventory, purchases

Periodic inventory system:

Inventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand.

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

FIFO

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a ________________ inventory system.

perpetual

Wholesalers

resell inventory to retail companies or to professional users.

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)

stockholders' equity increases net income increases total assets increase

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.

Inventory:

Items a company intends for sale to customers in the ordinary course of business. -current asset -Materials used currently in the production of goods to be sold Items held for resale Items currently in production for future sale

Which of the following methods are available for costing inventory?

FIFO Specific identification LIFO Weighted-average

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory.

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

increase an asset and increase revenue decrease an asset and increase an expense

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

incurred several years earlier.

Finished goods

inventory consists of items for which the manufacturing process is complete.

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

paid by the supplier.

Purchase returns are recorded in a separate contra purchase account in a _____________ inventory system

periodic

Which of the following inventory systems requires a physical count in order to determine cost of goods sold?

periodic inventory system

Net income:

Difference between revenues and expenses.

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

perpetual

"inventory"

periodic

"purchases"

classify inventory for a manufacturer into three categories:

(1) raw materials, (2) work in process, and (3) finished goods:

operating expenses

After gross profit, the next items reported are Selling, general, and administrative expenses

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

Debit Inventory

Income before income taxes:

Operating income plus nonoperating revenues less nonoperating expenses.

Operating income:

Profitability from normal operations that equals gross profit less operating expenses

Meller purchases inventory on account. As a results, Meller's

assets will increase.

Manufacturing companies

produce the inventories they sell, rather than buying them in finished form from suppliers. -buy the inputs for the products they manufacture.

four methods for inventory costing:

1. Specific 2. identification 3. First-in, first-out (FIFO) Last-in, first-out (LIFO) 4. Weighted-average cost -FIFO has a balance-sheet focus. -LIFO has an income-statement focus.

Multiple-step income statement:

An income statement that reports multiple levels of income (or profitability).

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?

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

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

FIFO

Perpetual inventory system:

Inventory system that maintains a continual record of inventory purchased and sold.

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

Which of the following represent reasons why managers closely monitor inventory levels?

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

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

Work in process

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

assets decrease by the cost of the inventory assets increase by the sales price of the inventory

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

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

Alexandra Inc. utilizes a periodic inventory system. Related to inventory, Alexandra Inc. must record period-end adjustments to:

close purchase-related temporary accounts record cost of goods sold for the period adjust the inventory balance to its proper ending balance

Under the periodic inventory system, purchase returns and purchase discounts accounts represent

contra purchases accounts.

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

Raw materials

inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

Work-in-process

inventory refers to the products that have been started in the production process but are not yet complete at the end of the period. The total costs include raw materials, direct labor, and indirect manufacturing costs called overhead.

Gross Profit

net sales - cost of goods sold

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

The purposes of the period-end adjustment in the periodic inventory system include:

recognize cost of goods sold relating to sales during the period close the temporary accounts relating to inventory purchases, discounts, and returns and allowances reflect the proper ending balance in the inventory account

in a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

summarized multiple-step income statement

reports multiple levels of profitability. Gross profit equals net revenues (or net sales) minus cost of goods sold. Operating income equals gross profit minus operating expenses. Income before income taxes equals operating income plus nonoperating revenues and minus nonoperating expenses. Net income equals all revenues minus all expenses.