Chapter 6

Periodic

"Inventory"

perpetual

"purchase"

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

Debit Inventory

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

FIFO

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

FIFO

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

Inventory Purchases

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

LIFO

Which of the following methods are available for costing inventory?

LIFO Weighted-average FIFO Specific identification

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

LIFO reserve

Companies that produce the inventory they sell are referred to as _____.

Manufacturers

The definition of inventory includes which of the following items?

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

FIFO

Most closely approximates the actual physical flow of inventory

Which of the following methods are not used for inventory costing?

NIFO Simple-average

If a company uses the periodic inventory system, how many entries are made when a sale occurs?

One

LIFO

Provides better matching of current revenues with current inventory cost

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.

If a company uses the perpetual inventory system, how many entries are made when a sale occurs?

Two

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

Two

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.

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

contra purchases accounts.

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

The shipping term FOB stands for

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

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.

A multiple-step income statement reports multiple levels of _____.

income

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.

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

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

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; greater

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

outdated

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.

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO _____.

reserve

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?

stockholders' equity increases net income increases total assets increase

FOB destination means title to the goods passes

when they arrive at the destination.

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

Cost of Goods Sold Inventory

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

FIFO

Under the perpetual inventory system, an adjusting entry is needed to close temporary inventory-related accounts, record cost of goods sold, and adjust the inventory account balance.

False

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

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

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

Manufacturers

Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs?

Perpetual inventory system

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

Work in process

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

Work in process Finished goods Raw materials

Inventory is classified as

a current asset.

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.

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.

Accounting errors must be corrected

as soon as they are discovered.

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 purposes of the period-end adjustment in the periodic inventory system include:

close the temporary accounts relating to inventory purchases, discounts, and returns and allowances recognize cost of goods sold relating to sales during the period reflect the proper ending balance in the inventory account

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

cost of goods sold. inventory.

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

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

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

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

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

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 net income

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

paid by the supplier.

Period-end adjustments are necessary for the:

periodic inventory system

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

perpetual

A _____ inventory system updates the inventory account each time a sale or purchase is made, whereas a _____ inventory system calculates cost of goods sold and ending inventory at the end of the reporting period.

perpetual periodic

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

Alexandra Inc. utilizes a periodic inventory system. Related to inventory, Alexandra Inc. must record period-end adjustments to:

record cost of goods sold for the period adjust the inventory balance to its proper ending balance close purchase-related temporary accounts

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