Chapter 6 SmartBook

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

Debit Inventory

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

FIFO

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

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

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

Beginning inventory plus purchases, plus freight-in, minus purchase discounts and returns, minus ending inventory calculates the amount of:

cost of goods sold

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

cost of goods sold. 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

perpetual

inventory

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

Period-end adjustments are necessary for the:

periodic inventory system

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

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 _____ basis.

FIFO

The definition of inventory includes which of the following items?

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

FIFO

Most closely approximates the actual physical flow of inventory

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

NIFO Simple-average

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

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

Periodic inventory system

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

Work in process

True or false: Under the perpetual inventory system, an adjusting entry is needed to close temporary inventory-related accounts, record cost of goods sold, and adjust the inventory account balance.

false

Cost of goods sold divided by average inventory is

inventory turnover

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

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

nonoperating

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

nonoperating

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

one

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

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

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

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

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

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

specific identification

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

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

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

perpetual

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

Freight-in costs are debited to Inventory in this inventory system:

perpetual only

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

raw materials

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

FIFO

periodic

purchases

perpetual inventory

freight is added directly to the inventory account

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

two

Where is inventory reported in the financial statements?

Balance sheet as a current asset

Which of the following correctly reflects the determination of cost of goods sold in a periodic inventory system?

Beginning inventory + net purchases - ending inventory

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

Cost of Goods Sold Inventory

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 _________ cost flow assumption more realistically matches the current cost of inventory with current sales revenue.

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

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

Work in process Raw materials Finished goods

Periodic inventory

a separate freight-in account is used

Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be

a separate freight-in account.

Accounting errors must be corrected

as soon as they are discovered.

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.

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

incurred several years earlier.

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

inventory purchases

___________ __________ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

inventory turnover

Companies that produce the inventory they sell are referred to as

manufacturing

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

FOB shipping point means title to the goods passes

when they are shipped

_______ _______ 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

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

LIFO FIFO Weighted-average Specific identification

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

contra purchases accounts.

The formula for inventory turnover is

cost of goods sold/average inventory

Inventory is classified as

current asset

Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error

immediately.

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

Purchasing inventory on account:

increases assets increases liabilities

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

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

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

outdated

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

periodic

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

FIFO

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

FIFO

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

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

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

The ___________ inventory system records all inventory-related transactions in the Inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale. The ________ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period.

Perpetual Periodic

Freight-in costs should be debited to the ______ Inventory account under the inventory system and to a separate Freight-in account under the ________ inventory system.

Perpetual periodic

Perpetual inventory system

Peter Company recognizes cost of goods sold each time it recognizes a sale. Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

LIFO

Provides better matching of current revenues with current inventory cost

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.

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

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

assets will increase.

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

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

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

direct labor raw materials indirect manufacturing costs

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

Net sales revenue minus cost of goods sold is

gross profit.

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

less

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.

Freight-in on inventory purchases is typically recognized as

part of the cost of purchasing inventory.

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

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

FOB destination means title to the goods passes

when they arrive at the destination.

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

work-in-process

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

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

Periodic inventory system

Sherman Company recognizes cost of goods sold after completing a physical inventory. Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.