ch. 7

when costs to purchase inventory are rising, using LIFO leads to reporting a _________ than FIFO

lower value for inventory on the balance sheet

when costs to purchase inventory are falling over time, using LIFO leads to reporting ______ cost of goods sold and __________ net income than FIFO

lower, higher

what's an example of a company you would expect to have a high inventory turnover ratio?

mcdonald's

gross profit equals ___________

net sales - cost of goods sold - a subtotal on the income statement

merchandise inventory

products acquired in a finished condition, ready for sale without further processing - ex: goods held for sale in the normal course of business

if a company's inventory costs are rising, ________ inventory costing method(s) typically results in a higher income tax expense

the FIFO

what do the inventory costing methods determine?

the amount of the debit to cost of goods sold and credit to inventory

what does days to sell measure?

the average number of days from the time inventory is purchased to the time it is sold

TRUE or FALSE? the inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP

true

TRUE or FALSE? the inventory methods apply to both perpetual and periodic inventory systems?

true

specific identification

used when accounting for expensive and unique inventory items

weighted average cost method

uses the average cost for cost of goods sold on the income statement and the average cost for inventory on the balance sheet

FIFO

uses the oldest cost for cost of goods sold on the income statement and the newest cost for inventory on the balance sheet

if a new company calculates the average cost of its inventory by adding together the total cost of all purchases and then dividing it by the number of units purchased during the period, it is using the ___________ _____________ cost method.

weighted average

if cost of acquiring inventory is rising, LIFO will result in what compared to FIFO?

- gross profit will be lower - cost of goods sold will be higher - income tax expense will be lower

what may occur with a higher inventory turnover ratio?

- reduction in inventory storage costs - reduction in obsolescence

what may cause inventory turnover ratios to vary significantly between companies in the same industry?

- some companies may sell fewer higher-cost goods - come companies may sell more lower-cost goods

inventory costing methods allowed by US GAAP include what?

- specific identification - weighted average - last in, first out - first in, first out

what are the assumptions a company makes about its inventory cost flow?

- that it has an effect on the company's income statement - that is has an effect on the company's balance sheet

what's true about an increased inventory balance?

- undesirable if it is a result of an accumulation of unsaleable inventory - desirable if management is building up stock in anticipation of higher sales

assuming rising inventory prices, which inventory method results in the higher ending inventory value in order of highest ending inventory to lowest ending inventory value?

1. FIFO 2. weighted average 3. LIFO

in order from highest to lowest, which companies would have the anticipated inventory turnover ratios?

1. walmart 2. tiffany & co. 3. bath iron works (battleships)

if a company assumes that its inventory costs flow out in the opposite order from which of the goods were purchased, it uses _____ to value its inventory.

LIFO

which company is most likely to have a higher inventory turnover than its competitors within the same industry?

a company with lower-priced goods and lower gross profit

which financial statements are needed to calculate the inventory turnover ratio?

balance sheet, income statement

how does the inventory costing methods affect the income statement when costs tend to rise over time?

cost of goods sold on the income statement differs between the methods causing income tax expense to differ

TRUE or FALSE? GAAP requires that a business must use an inventory accounting method that is the same as the physical flow of goods in and out of the business

false

an increase in a company's inventory balance from a prior year is __________

good if the inventory turnover ratio is higher

FIFO, an inventory costing method, actually describes how to calculate the cost of ______

goods sold

when costs to purchase inventory are falling over time, using LIFO leads to reporting _______ than FIFO

higher inventory on the balance sheet

when costs to purchase inventory are rising, using LIFO leads to reporting ____ cost of goods sold and ____ net income than FIFO

higher, lower