Chapter 6 ACC 221

The inventory turnover ratio directly measures Blank______.

the times per period the average inventory balance is sold

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

two

Inventory is classified as

Current Asset

On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as.....

Nonoperating

LIFO

Provides better matching of current revenues with current inventory cost

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

Work in process

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

assets will increase

The inventory turnover ratio directly measures

the times per period the average inventory balance is sold

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Cost of goods sold inventory

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

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

Debit inventory

Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?

FIFO Reason:FIFO assumes the inventory costs flow first-in, first-out, which is the same order as the physical flow of inventory.

The shipping term FOB stands for

Free on board

Net sales revenue minus cost of goods sold is

Gross profit

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

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

The (blank) cost flow assumption more realistically matches the current cost of inventory with current sales revenue.

LIFO

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the

LIFO reserve

Companies that produce the inventory they sell are referred to as

Manufacturers

FIFO

Most closely approximates the actual physical flow of inventory

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

Pain by the supplier

Perpetual inventory system

Peter Company recognizes cost of goods sold each time it recognizes a sale.

Periodic inventory system

Sherman Company recognizes cost of goods sold after completing a physical inventory.

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the Blank______ method.

Specific Identification

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 methods are available for costing inventory? (Select all that apply.)

Weighted-average LIFO FIFO Specific identification

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

Which of the following items are readily available from an inventory account under the perpetual inventory system?

cost of units sold individual purchases beginning inventory balance ending inventory balance

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

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

Freight-in is

included as a cost of inventory.

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

included in Gerald's inventory.

Purchasing inventory on account:

increases liabilities increases assets

Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because:

inventory costs generally change over time.

The (blank) (blank) ratio shows the number of times the firm sells its average inventory balance during a reporting period.

inventory turnover

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be (blank) than ending inventory determined using the FIFO inventory assumption.

lower

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a Blank______ income statement.

multiple-step

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)

net income increases stockholders' equity increases total assets increase

Freight-in on inventory purchases is typically recognized as:

part of the cost of purchasing inventory.

Under the (blank) inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.

perpetual

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

FOB destination means title to the goods passes

when they arrive at the destination.

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?

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

For internal record keeping, most companies carry their inventory using the (blank) basis.

FIFO

The (blank) inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

FIFO

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

FIFO

Which inventory costing method assumes that the inventory's costs flow out in the same order the goods are received?

FIFO

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

Finished goods

Which inventory account consists of the cost of items for which the manufacturing process is complete?

Finished goods inventory

A multiple-step income statement reports multiple levels of

Income

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

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

Inventory

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

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.)

Inventory Cost of Goods Sold

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

LIFO reserve

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

Manufacturers

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

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

Raw materials

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

Raw materials Work in process Finished goods

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

Raw materials inventory

______ inventory refers to the products that have been started in production, but are still incomplete.

Work-in-process

The formula used to calculate inventory turnover is

cost of goods sold divided by average inventory.

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be (blank) than cost of goods sold determined using the FIFO inventory assumption.

higher

Cost of goods sold divided by average inventory is

inventory turnover

Revenues and expenses arising from activities that are not part of the company's operations are classified as Blank______ revenues and expenses.

nonoperating

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

old

The Work-in-Process inventory account typically includes which costs? (Select all that apply.)

raw materials indirect manufacturing costs direct labor

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 (blank)

reserve

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

LIFO

The specific identification method (select all that apply)

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

Vogel Company maintains its inventory records using the FIFO assumption, but reports its inventory consistent with LIFO. At the end of the year, Vogel converts its inventory balance from FIFO to LIFO by using the

LIFO adjustment

The definition of inventory includes which of the following items?

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

Which inventory cost flow method approximates the physical flow of inventory items?

FIFO

Where is inventory reported in the financial statements?

Balance sheet as a current asset