Accounting Chapter 6: Inventory and Cost of Goods Sold

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

Inventory Cost of Goods Sold

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

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

LIFO Specific identification FIFO Weighted-average Wrong: NIFO - Reason: Next-in, first-out is not permitted

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

LIFO reserve

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

Simple-average NIFO Reason: Next-in first-out is not permitted

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

To minimize costs of inventory write-downs due to obsolete inventory. To ensure that sufficient units are available.

Inventory is classified as

a current asset.

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

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

Debit Inventory

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

FIFO

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

FIFO

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

Perpetual inventory system

Match each scenario with the type of inventory system.

Perpetual inventory system > Peter Company recognizes cost of goods sold each time it recognizes a sale. Periodic inventory system > Sherman Company recognizes cost of goods sold after completing a physical inventory.

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.

The shipping term FOB stands for

free on board

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.

higher, greater, more, or larger

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory.

A multiple-step income statement reports multiple levels of ___.

income, earnings, profit, or profitability

Purchasing inventory on account:

increases assets and increases liabilities

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

incurred several years earlier.

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

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

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

inventory or inventories

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. Wrong: current assets. - Reason: All companies account for current assets. liabilities. - Reason: All companies account for liabilities.

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

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, or less

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

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

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 Wrong: understated assets, retained earnings, and net income - Reason: effect on current year statements not the following year statements. overstated assets, retained earnings and net income - Reason: the balance sheet is correct because the effect of the error counterbalanced; net income is too high because the beginning balance is too low. the financial statement will be correct - Reason: net income is too high because beginning inventory balance is too low

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 Wrong: understated assets; overstated retained earnings and net income the financial statements are correct - Reason: ending balance is too low; cost of goods sold too high; net income too low; retained earnings too low.

FOB shipping point means title to the goods passes

when they are shipped.