Accounting Smartbook Chapter 6

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods. - Purchases - Sales Revenue - Inventory - Cost of Goods Sold

- Inventory - Cost of Goods Sold

Which of the following represent reasons why managers closely monitor inventory levels? - To minimize costs of inventory write-downs due to obsolete inventory. - To increase the average days in inventory. - To ensure that sufficient units are available.

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

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 Sales Revenue $1,500 - Debit Inventory $1,500; credit Cost of Goods Sold $1,500 - Debit Accounts Receivable $2,000; credit Inventory $2,000 - Debit Cost of Goods Sold $1,500; credit Inventory $1,500

Debit Cost of Goods Sold $1,500; credit Inventory $1,500

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outdated, spoiled, obsolete, old, expired, or aged

What type of company purchases raw materials and makes goods to sell? - Retailers - Manufacturers - Wholesalers

Manufacturers

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs - that have not yet been incurred. - incurred several years earlier. - incurred solely on the balance sheet date.

incurred several years earlier

Meller purchases inventory on account. As a results, Meller's - income will decrease. - assets will increase. - stockholders' equity will decrease. - liabilities will decrease.

assets will increase

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

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 -Purchases - Cost of Goods Sold - Raw Materials

inventory

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

Inventory is classified as - a current asset. - a non-current asset. - a current liability. - a revenue.

a current asset

___________ ___________ 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 shipping term FOB stands for - freight over board. - free on board. - freight on board. - free onto buyer.

free on board

Where is inventory reported in the financial statements? - Income statement as revenue - Balance sheet as a current asset - Balance sheet as a non-current asset - Statement of cash flows as an investing activity

Balance sheet as a current asset

Which of the following accounts are typically reported in the balance sheet of a manufacturing company? - Finished goods - Raw materials - Work in process - Cost of goods sold

- Finished goods - Raw materials - Work in process

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

FIFO

Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production. - Merchandise inventory - Raw materials inventory - Work-in-process inventory - Finished goods inventory

Raw materials inventory

In a perpetual inventory system, when a company sells inventory on account, how many entries are required? - One - Zero - Three - Two

Two

The definition of inventory includes which of the following items? - Items held for resale - Items currently in production for future sale - Materials used currently in the production of goods to be sold - Items held for use or disposal

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

Which of the following methods are not used for inventory costing? (Select all that apply.) - NIFO - Simple-average - Specific identification - LIFO - FIFO - Weighted-average

- NIFO - Simple-average

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to: - decrease an asset and decrease revenue - increase an asset and increase revenue - decrease an asset and increase an expense - increase an asset and decrease an expense

- increase an asset and increase revenue - decrease an asset and increase an expense

Purchasing inventory on account: - increases liabilities - increases assets - decreases equity - decreases assets - increases equity

- increases liabilities - increases assets

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

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

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: - revenue - operating expenses - gains and losses - inventory

inventory

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following? - Debit Sales Revenue - Debit Accounts Payable - Debit Inventory - Debit Purchases

Debit Inventory

Match the inventory cost flow assumptions for FIFO and LIFO: - provides better matching of current revenues with current inventory cost - most closely approximates the actual physical flow of inventory

FIFO: most closely approximates the actual physical flow of inventory LIFO: provides better matching of current revenues with current inventory cost

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory? - Weighted-average - LIFO - FIFO

LIFO

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

LIFO

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

LIFO

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the - LIFO savings - LIFO reserve - FIIFO reserve - FIFO cost

LIFO reserve

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

LIFO reserve

Match each scenario with the type of inventory system (either the perpetual inventory system OR periodic inventory system): - Peter Company recognizes cost of goods sold each time it recognizes a sale - Sherman Company recognizes cost of goods sold after completing a physical inventory

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

The lower of cost and net realizable value method was developed to - prevent the company from selling the inventory below its original cost. - provide an alternative to the FIFO, LIFO, and weighted-average methods. - avoid reporting inventory at an amount that exceeds the benefits it provides

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

A periodic inventory system measures cost of goods sold by - debiting cost of goods sold for all purchases of inventory. - making entries to the inventory account for each purchase and sale. - estimating the amount of inventory sold. - counting inventory at the end of the period.

counting inventory at the end of the period

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are - paid by the supplier. - included in Gerald's inventory. - treated as a selling expense

included in Gerald's inventory

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

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; smaller - lower of cost and sales revenue; smaller - cost-benefit; greater - lower of cost and sales revenue; greater - cost-benefit; smaller - lower of cost and net realizable value; greater

lower of cost and net realizable value; greater

Companies that produce the inventory they sell are referred to as ___________

manufacturers

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. - single-step - current - multiple-step - classified

multiple-step

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 destination means title to the goods passes - when they are shipped to the customer. - when they arrive at the destination.

when they arrive at the destination

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 - Debit Cost of Goods Sold $1,000; credit Inventory $1,000 - Debit Cost of Goods Sold $700; credit Net Income $300; credit Service Revenues $1,000

- Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 - Debit Cost of Goods Sold $700; credit Inventory $700

Which of the following methods are available for costing inventory? (Select all that apply.) - Weighted-average - Simple-average - LIFO - Specific identification - NIFO - FIFO

- Weighted-average - LIFO - Specific identification - FIFO

Using the perpetual inventory system, what is the effect of a sale of inventory on assets? - assets increase by the sales price of the inventory - assets decrease by the sales price of the inventory - assets increase by the cost of the inventory - assets decrease by the cost of the inventory

- assets increase by the sales price of the inventory - assets decrease by the cost of the inventory

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. - liabilities. - inventory. - current assets.

- cost of goods sold - inventory

A multiple-step income statement reports multiple levels of ___________

Income, earnings, profit, or profitability

Which of the following accounts would be found in the balance sheet of a manufacturing company? - Work in process - Cost of goods sold - Merchandise inventory

Work in process

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are - treated as a selling expense. - Deducted from Ronald's inventory. - paid by the supplier.

paid by the supplier

For internal record keeping, most companies carry their inventory using the ____________ basis. - FIFO - specific identification - LIFO - average cost

FIFO

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 assets, retained earnings and net income - the financial statement will be correct - understated assets, retained earnings, and net income - overstated net income

overstated net income