ACCT Chapter 6

Inventory cost methods

-specific identification -first-in, first-out (FIFO) -Last-in, first-out (LIFO) -Weighted-average cost

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

FIFO

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

FIFO

First-in, first-out method (FIFO):

Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out)

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

LIFO reserve

Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be

a separate freight-in account

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

Where is inventory reported in the financial statements?

balance sheet as a current asset

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

included in Gerald's inventory

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

In a perpetual inventory system, when inventory is purchased, the _____ account is debited, whereas in a periodic system, the _____ account is debited

inventory purchases

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.

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; greater

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a

multi-step income statement

When a sale occurs under the periodic inventory system, we record:

only the sale, but not the related cost of goods sold

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

outdated

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

paid by the supplier

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a _____ inventory system

perpetual

Freight-in costs are debited to Inventory in this inventory system:

perpetual only

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

FOB shipping point

title passes when seller ships the inventory

FOB destination

title passes when the inventory reaches the buyer's destination

FOB shipping point means title to the goods passes:

when they are shipped

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

Debit inventory

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

Inventory Cost of Goods Sold

Last-in, first-out method (LIFO):

Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out)

Inventory

Items a company intends for sale to customers in the ordinary course of business. -Items currently in production for future sale -Materials used currently in the production of goods to be sold -Items held for resale

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.

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

In a periodic inventory system, purchase returns

are recorded in a separate contra purchases account.

Under the periodic inventory system, purchase returns and purchase discounts accounts represent

contra purchases accounts

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

periodic inventory system

does not continually record inventory amounts. Instead, it calculates the balance of inventory once per period, at the end, based on a physical count of inventory on hand.

FOB

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

A multiple-step income statement reports multiple levels of

income/ profit

Purchasing inventory on account:

increases assets increases liabilities

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

Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because:

inventory costs generally change over time.

The ______ inventory system records all inventory-related transactions in the Inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale. The ______ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period.

perpetual periodic

perpetual inventory system

records inventory on perpetual aka continual basis

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)

stockholders' equity increases net income increases total assets increase