Chapter 7 Smartbook

Which of the following income statement line items are affected by the inventory method chosen? (Select all that apply.)

Gross Profit Income Tax Expense Income before Income Tax Expense Income from Operations Net Income

When costs to purchase inventory are rising, using LIFO leads to reporting ______ cost of goods sold and ______ net income than FIFO.

higher; lower

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest; newest

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, Cost of Goods Sold equals ______.

$33

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10. It purchased 3 more at $12. It sold 4 units during the period. What is the Cost of Goods Sold using the weighted average cost method?

$44.80

The assumption that a company makes about its inventory cost flow has ______. (Check all that apply.)

an effect on the company's income statement an effect on the company's balance sheet

When costs to purchase inventory are rising, using LIFO leads to reporting a ______ than FIFO.

lower value for Inventory on the balance sheet

The costs of carrying inventory include the costs of ______. (Check all that apply.)

spoilage theft storage obsolescence

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.

$302

Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals ______ times.

10 Reason: Inventory turnover ratio=cost of goods sold/average inventory or $10,000/ (($800 + $1,200)/2).

Barrry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals _____ days (assume 365 days per year).

36.5 or 37

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be ______.

73 days

Inventory costing methods allowed by US GAAP include:1) specific _____ ;2) _____ average; 3) last in, _____ out; and 4) first in, _____ out.(Enter one word per blank.)

Blank 1: identification Blank 2: weighted Blank 3: first Blank 4: first

The weighted average cost method uses the weighted average cost to calculate the value of ______. (Check all that apply.)

Cost of Goods Sold Inventory

What effect does the inventory costing method have on the income statement? The inventory methods affects the amount of the ______.

Cost of Goods Sold, Gross Profit, Income from Operations, Income before Income Tax Expense, Income Tax Expense and Net Income

Of the 4 companies listed below, which company is more likely to use specific identification to value its inventory and cost of goods sold?

Custom home builder

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

FIFO

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

Which financial statements are needed to calculate the inventory turnover ratio? (Check all that apply.)

Income statement Balance sheet

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

Which inventory costing method uses the newest cost for Cost of Goods Sold on the income statement and the oldest cost for Inventory on the balance sheet?

LIFO

Which of these might cause the value of inventory to fall below its original cost? (Check all that apply.)

Obsolescence from going out of style Increased competition Damage

Which of these inventory accounting methods are acceptable under US GAAP? (Check all that apply.)

Specific identification Weighted average LIFO FIFO

True or false: Accounting rules allow companies to choose, from a variety of methods, the inventory method that best fits their business environment.

True

FIFO, LIFO, and weighted average inventory costing methods are based on ______.

assumptions that accountants make about the flow of inventory costs

Days to sell measures the average number of ______.

days from the time inventory is purchased to the time it is sold

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. Market values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at ______.

$1,000 The lower-of-cost-or-market rule requires the DyeZ boxes be recorded at the lower market value of $8 instead of the higher cost of $10. Thus, Inventory equals $1,000 (=(200 bottles x $1) + (100 boxes x $8)).

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchased 3 more at $12 each. What is the weighted average cost per unit?

$11.20

Beta Company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is ______.

$12.10

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250 Reason: Inventory equals $2,250 (=$500 + 550 + (2x$600)). Cost of Goods Sold equals $550.

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is ______.

$3,780

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds that was purchased on July 9. Using periodic specific identification, its Cost of Goods Sold is ______.

$550 Specific identification records the actual cost of the actual diamond sold. The diamond that was purchased on July 9 cost $550.

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using periodic weighted average cost, its Cost of Goods Sold is ______.

$560

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500; 2 purchased July 9 for $550 each; and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using LIFO periodic, its Cost of Goods Sold is ______.

$600

Which of these would explain an increase in a company's inventory turnover ratio? (Check all that apply.)

A decrease in total inventory An increase in the demand for the company's products

Which statements are true? (Select all that apply.) A grocery store may or may not use the Last-in, First-out inventory method. The inventory method selected must be based on the physical flow of goods. The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods. First-in, Last-out is one of the titles of inventory methods allowed by GAAP.

A grocery store may or may not use the Last-in, First-out inventory method. The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods.

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

Which inventory costing method uses the oldest cost for Cost of Goods Sold on the income statement and the newest cost for Inventory on the balance sheet?

FIFO

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs? (Check all that apply.)

LIFO FIFO

Which of the following may occur with a higher inventory turnover ratio? (Check all that apply.)

Reduction in obsolescence Reduction in inventory storage costs

Specific identification is ______.

an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item

If a new company calculates the average cost of its inventory by adding together the total cost of all purchases and then dividing it by the number of units purchased during the period, it is using the weighted _____ cost method. (Enter one word per blank.)

average

Inventory is reported on the ______. Later, when the inventory is sold, it becomes ______.

balance sheet as a current asset; Cost of Goods Sold on the income statement

In a perpetual inventory system, Inventory is initially recorded at ______.

cost

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

The goals of inventory managers include ______. (Check all that apply.)

having enough inventory on hand to meet customer demand keeping the costs of buying and storing inventory as low as possible making sure that inventory quality meets customer expectations

The inventory turnover measures the ______.

number of times the average inventory balance is bought and sold

If Barry Bees, Inc.'s days to sell equals 73 days based on a 365-day year, then its inventory turnover ratio equals _____ times.

5

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under the _____ _____ inventory method, cost of goods sold would equal $65.

Blank 1: specific Blank 2: identification

Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is ______.

$65 Reason: Since 8 eggs of the 35 eggs available to sell were left, then 27 eggs were sold. FIFO assumes the oldest eggs are to be sold first. Thus, Cost of Goods Sold equals (5 eggs x $2) + (22 eggs x $2.50).

Which of the following statements are true? (Check all that apply.) An increased inventory balance is desirable if management is building up stock in anticipation of higher sales. An increased inventory balance is desirable if the resulting inventory turnover ratio is lower. An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory.

An increased inventory balance is desirable if management is building up stock in anticipation of higher sales. An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory.

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.