Chapter 6 Accounting

income before taxes

operating income+plus nonoperating revenues -nonoperating expenses

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

outdated

Ending Inventory

units assumed not sold x their unit cost

Finished Goods

units of product that have been completed but not yet sold to customers

How do merchandising and manufacturing companies record revenues?

when selling inventory to customers

FOB destination means title to the goods passes

when they arrive at the destination

weighted average cost

Assumes units sold come from random mixture of all goods available for sale

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

FIFO

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

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

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

debit inventory

operating income

gross profit - operating expenses

How do inventory flows work?

Manufacturing Company --->merchandising companies

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be _blank

higher, greater, more, or larger

Purchasing inventory on account:

increases liabilities increases assets

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

incurred several years earlier.

FIFO formula

cost of goods available for sale=cost of goods sold+ ending inventory

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

assets will increase

FIFO

first in first out (first items purchased are the first ones sold)

Net Income

revenues-all expenses

Weighted average cost formula

cost of goods available for sale/number of units available for sale

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.

multiple-step income statement

an income statement that reports multiple or levels of income (or profitability)

How is inventory reported on the balance sheet?

asset and represents the cost of inventory not yet sold at the end of the period

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

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

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.

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

specific identification method

inventory method that matches or identifies each unit of inventory with its actual cost *normally used by companies with unique, expensive low sales volume*

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 ______ 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

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

raw materials

Unprocessed natural products used in production

How is cost of goods reported?

expense on the income statement Represents the cost of inventory sold

Gross Profit

net sales - cost of goods sold

What are the levels of profitability?

1. Gross Profit 2.Operating income 3.Income before taxes 4. Net income

what types of inventory do the manufacturing companies have?

1. Raw Materials 2. Work in progress 3. Finished Goods

Four methods of inventory costing:

1.Specific Identification 2. FIFO (First in, first out) 3. LIFO (Last in, last out) 4. Weighted average cost

The shipping term FOB stands for

free on board

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

FIFO

Which of the following methods are available for costing inventory? (Select all that apply.)

LIFO Specific identification Weighted-average FIFO

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

LIFO Reserve

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 of the following methods are not used for inventory costing? (Select all that apply.)

NIFO Simple-average

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

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

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

work in process

units of product that are only partially complete and will require further work before they are ready for sale to the customer

How do service companies record revenues?

upon providing services to customers