Accounting Chapter 8

In a perpetual inventory system the inventory account is adjusted

when inventory is sold and when inventory is purchased.

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

FIFO

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.

LIFO

A periodic inventory system

does not continuously track the cost of merchandise sold. does not continuously track the quantity of merchandise.

The gross profit ratio is computed as _____ divided by net sales

gross profit

In a perpetual inventory system the inventory account is

continually adjusted.

A(n)______ inventory system adjusts inventory at the end of each reporting period.

periodic

The dollar-value LIFO (DVL) method

simplifies recordkeeping. reduces the risk of liquidation of layers.

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

Wholesale and retail companies matches

Purchase goods that are primarily in completed form.

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

Cost flow ------ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.

assumption

Inventory for a ------ company consists of raw materials, work in process, and finished goods.

manufacturing

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO.

The LIFO reserve shows how ending inventory would have differed if the company had utilized _______ or ______, instead of LIFO.

weighted-average FIFO

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

work in process

Which of the following are disadvantages of unit LIFO?

Significant recordkeeping costs Possibility of LIFO liquidation

When inventory quantities _____ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system.

decline

A LIFO liquidation occurs when inventory quantities ______

decrease

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been

$2,000 higher.

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the 2016 fiscal year would have been

$50,000 higher if it had used FIFO.

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the 2016 fiscal year would have been

$50,000 lower if it had used FIFO.

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be

40%.

What type of expenditures should be included in the cost of inventory of a manufacturing company?

Expenditures necessary to acquire inventory. Expenditures necessary to bring inventory to sales location.

True or false: A periodic inventory system allows management to determine the amount of goods on hand without having to take a physical count.

False

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what

How units of goods and their associated costs flow through the system.

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

LIFO

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

LIFO

Another name for the LIFO reserve account is

LIFO allowance.

If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors.This is know as the

LIFO conformity rule.

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

The goods a wholesale company purchases in finished form are referred to as what?

Merchandise inventory

Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory.

Mouse pads

What is included in the cost of merchandise inventory?

Necessary costs incurred to get the goods in location for sale. The purchase price of the goods.

Manufacturing companies

Purchase goods that are used to produce another product.

Which inventory costing method matches each unit sold with its actual cost?

Specific identification

Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units?

The company purchases 950 units during the year.

True or false: Dollar-value LIFO allows a company to combine a large variety of goods into one pool.

True

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools.

Determining ownership of goods that are in transit at the end of the accounting period is important to

assure proper inventory cutoff.

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____.

at the end of the period; each time goods are sold

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to

combine a large variety of goods in one pool.

At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit.

cutoff

The FIFO method assumes that units sold are the _________ units acquired and that units remaining in ending inventory are the ________ units purchased.

first; last

Ownership of inventory at the end of the accounting period is determined for

goods shipped to customers. goods shipped by suppliers.

Inventory cost flow assumptions can be used to assign dollar amounts to

goods sold. ending inventory.

The definition of inventory includes which of the following items?

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

The specific identification method of inventory costing matches each unit with

its actual cost.

The _____ inventory method assumes that the units in ending inventory were the items acquired first.

last-in, first-out

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

Use of LIFO inventory pools reduces the chance of unintentional LIFO layer -----

liquidation

A(n)----- inventory system adjusts inventory at the end of each reporting period.

periodic

Which inventory system allocates cost of goods available for sale only at the end of each reporting period?

periodic inventory system

A(n)_______ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise.

perpetual

A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs.

perpetual; perpetual

LIFO inventory pools

simplifies recordkeeping and reduces the risk of LIFO liquidation by grouping inventory units into pools based on physical similarities of the individual units.

A DVL pool is made up of items

that are likely to have similar cost change pressures.

Cost of inventory includes

the cost to bring inventory to its desired condition expenditures to acquire the inventory the cost to bring inventory to its desired location

The LIFO inventory method assumes that the units that remain in ending inventory are

the oldest units in inventory.

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

work in process finished goods raw materials

specific identification method

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