Chapter 6 Accounting

Bottom, Inc. paid an invoice for $1,000, with discount terms of 1/7, n/30, within the discount period. The net amount paid was: Multiple choice question.

$990

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

Cost of Goods Sold Inventory

Which of the following is a correct interpretation of the information provided by the gross profit ratio?

It measures the amount by which the inventory sale exceeds its cost.

Periodic inventory system

Sherman Company recognizes cost of goods sold after completing a physical inventory.

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

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

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

Work in process

Inventory is classified as

a current asset.

The weighted average cost method assumes that cost of goods sold consists of

a mixture of all the goods available for sale.

The weighted average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

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

When inventory is sold, the cost of inventory is recognized as COGS or a(n) ___________

expense

he FIFO method assumes that units sold are the _______ units acquired

first

The purchase discount term, 2/10, n/30, means that the purchaser ________

has 10 days from the purchase date in which to pay and receive a 2% discount

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

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 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

Cost of goods sold divided by average inventory is

inventory turnover

The ___________ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

inventory turnover

Peter Company, a produce distributer, always tries to sell its oldest produce first. Peter company

is allowed to use the FIFO, LIFO, or Weighted-average cost flow assumptions.

The FIFO inventory method assumes that units remaining in ending inventory are the ________ units purchased.

last

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 inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

two

Periodic inventory system

Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

Accounting errors must be corrected

as soon as they are discovered.

Inventory not yet sold is classified as a(n) ______ in the _______ ________

asset, balance sheet

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. inventory

Gross profit divided by net sales equals

gross profit ratio.

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

inventories

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

inventories

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

The cost of goods not yet sold is recorded in the ______ account, whereas the cost of goods that are sold to customers is recorded in _____.

Inventory; Cost of Goods Sold

Which of the following is a correct interpretation of the information provided by the gross profit margin?

It indicates the percentage of each sales dollar available to cover other expenses.

Which of the following methods are available for costing inventory?

LIFO, Specific identification, FIFO, Weighted-average

Purchasing inventory on account:

increases liabilities increases assets

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

incurred several years earlier.

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

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

manufacturers

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

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

the oldest units in inventory.

The inventory turnover ratio directly measures ____

the times per period the average inventory balance is sold

True or false: The inventory cost flow assumption must match the physical flow of inventory units. True false question.

False

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

Finished goods Work in process Raw materials

____________ companies purchase inventory that is primarily in finished form and ready for resale to customers.

Merchandising

LIFO

Provides better matching of current revenues with current inventory cost

The specific identification method

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

FOB destination means title to the goods passes

when they arrive at the destination.

Which inventory costing method assumes that the inventory's costs flow out in the same order the goods are received?

FIFO

True or false: The inventory cost flow assumption must match the physical flow of inventory units.

False

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

LIFO

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

LIFO

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

LIFO

Perpetual inventory system

Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

Perpetual inventory system

Peter Company recognizes cost of goods sold each time it recognizes a sale.

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

Simple-average NIFO

True or false: When goods are sold, the cost of the goods is transferred from the Inventory account to the Cost of Goods Sold account.

True

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 formula for inventory turnover is

cost of goods sold divided by average inventory.

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.

specific identification

The shipping term FOB stands for

free on board

A multiple-step income statement reports multiple levels of

profitability

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

FIFO

Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?

FIFO

What type of company purchases raw materials and makes goods to sell?

Manufacturers

The definition of inventory includes which of the following items?

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

FIFO

Most closely approximates the actual physical flow of inventory

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

Net sales revenue minus cost of goods sold is

gross profit

The gross profit ratio is calculated as

gross profit divided by net sales.

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

Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error

immediately

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

included in Gerald's inventory.

Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.

merchandising

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 ________

old

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

old

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

paid by the supplier

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 increase net income increases stockholders' equity increases

FOB shipping point means title to the goods passes

when they are shipped.