Chapter 6 Smart Books

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

NIFO Simple-average

The shipping term FOB stands for

free on board.

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

lifo

Which of the following methods are available for costing inventory?

LIFO Weighted-average Specific identification FIFO

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

outdated

The primary benefit of LIFO is:

tax savings

If a company pays freight-in for its inventory, that amount will later be included in

cost of goods sold.

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

raw material

The Work-in-Process inventory account typically includes which costs?

raw materials indirect manufacturing costs direct labor

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

specific identification

Which of the following companies would be most likely to utilize the specific identification method?

Adams Company produces one-of-a-kind products.

Where is inventory reported in the financial statements?

Balance sheet as a current asset

Perpetual inventory system

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

The ___ 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 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

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

FIFO

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

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

Manufacturers

Periodic inventory system

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

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

To ensure that sufficient units are available.

Inventory is classified as

current asset

Freight-in is

included as a cost of inventory.

The specific identification method

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

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

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 assets increases liabilities

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

Work in process

Freight-in is recorded as part of ______, whereas freight out is often recorded as ______.

inventory; selling expense

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

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

Debit Inventory

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

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

FIFO

Catalina Bookstore pays freight on books shipped to its store. The shipping cost is debited to Inventory. When the books are sold, the freight costs pertaining to the books are included in:

cost of goods sold

Costs related to manufacturing products typically include

direct labor overhead raw materials

Companies that produce the inventory they sell are referred to as

manufacturers

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

LIFO

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

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

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

nonoperating

Average days in inventory measures

the average time the inventory is held.

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

Work in process Raw materials Finished goods

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

FIFO

Most closely approximates the actual physical flow of 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.

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

Inventory Cost of Goods Sold

The cost of goods not yet sold is recorded in the ______ account, whereas the cost of goods that are sold to customers is recorded in _____.

Inventory; Cost of Goods Sold

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

FIFO

True or false: When goods are sold, the cost of the goods is transferred from the Inventory account to the Cost of Goods Sold account.

True

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

Two

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

assets will increase.

The FIFO method assumes that units sold are the ___ units acquired.

first

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.

greater

A multiple-step income statement reports multiple levels of

income

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

incurred several years earlier.

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

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

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

inventory. cost of goods sold.

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 serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.

merchandising

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

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?

net income increases stockholders' equity increases total assets increase

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

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

paid by the supplier.

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

A company is most likely to utilize the specific identification method if its inventory consists of

unique products. very expensive products.

FOB shipping point means title to the goods passes

when they are shipped.

Beginning inventory is $60,000. Purchases of inventory during the year are $100,000. Cost of goods sold is $120,000. What is ending inventory?

$40,000

Beginning inventory is $20,000. Purchases of inventory during the year are $100,000. Ending inventory is $50,000. What is cost of goods sold?

$70,000

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 of the following costs are recognized in work in process for a manufacturing company?

Direct labor Raw materials Overhead

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

FIFO

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

Finished goods 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

The definition of inventory includes which of the following items?

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

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

LIFO

The primary benefit for choosing this method is that it tends to save taxes.

LIFO

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

LIFO

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

LIFO reserve

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

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

LIFO reserve

Perpetual inventory system

Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

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

Perpetual inventory system

LIFO

Provides better matching of current revenues with current inventory cost

Periodic inventory system

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