ACC SmartBook Chapter 6

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

The definition of inventory includes which of the following items?

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

Purchasing inventory on account:

- increases assets - increases liabilities

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

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

FIFO

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

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

The ______ 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 cost flow method approximates the physical flow of inventory items?

FIFO

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

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

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

LIFO

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

LIFO

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

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

LIFO reserve

FIFO: Most closely approximates the actual physical flow of inventory

LIFO: Provides better matching of current revenues with current inventory cost Provides better matching of current revenues with current inventory cost

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

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

Work in process

Inventory is classified as

a current asset

Accounting errors must be corrected

as soon as they are discovered.

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

assets will increase.

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

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

Where is inventory reported in the financial statements?

balance sheet as a current asset

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

_______ _______ inventory consists of items for which the manufacturing process is complete

finished goods/products

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

immediately

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.

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

inventory

The ______ ______ 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 ______ than ending inventory determined using the FIFO inventory assumption.

lower, smaller, less

Companies that produce the inventory they sell are referred to as

manufacturers

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

manufacturers

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.

more, higher, greater, larger

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

______ ______ 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 turnover ratio directly measures

the times per period the average inventory balance is sold

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

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

FOB shipping point means title to the goods passes

when they are shipped.

FOB destination means title to the goods passes

when they arrive at the destination.

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

two, b/c one entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory.

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

work-in-process

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.

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

- direct labor - raw materials - indirect manufacturing costs

The specific identification method (select all that apply):

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

Net sales revenue minus cost of goods sold is

gross profit

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

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

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

outdated, spoiled, obsolete, old, expired or aged

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

paid by the supplier

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

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

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

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

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

Cost of Goods Sold Inventory

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

- Raw materials - Work in process - Finished goods

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

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)

- total assets increase - net income increases - stockholders' equity increases

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

LIFO

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

LIFO

A multiple-step income statement reports multiple levels of

income, earnings, profit, or profitability

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

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

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

perpetual

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

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

- LIFO - Specific identification - Weighted-average - FIFO