Chapter 7 cost of goods sold and inventory (ACCT Exam 2)
Which inventory costing method uses the oldest cost for Cost of Goods Sold on the income statement and the newest cost for Inventory on the balance sheet?
FIFO
True or false: Regardless of the inventory costing method used, the financial statements will always report the same amount of inventory on the balance sheet and cost of goods sold on the income statement.
False: The different methods typically result in different amounts on the balance sheet and income statement because each method assumes different inventory items with different costs are sold. For example, FIFO assumes the older items are sold first and LIFO assumes the newer items are sold first.
A company had a beginning inventory of 5 units that cost $10 each. During the month, 15 units were purchased for $11 each. The company sold 12 units during the month and had 8 remaining in the ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be
$5 more than if it had used LIFO.
Which of the following statements are true?
- An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory. - An increased inventory balance is desirable if management is building up stock in anticipation of higher sales.
To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ______.
- Detect shrinkage - Detect bookkeeping errors - Detect theft
Using a perpetual inventory system, the effect on the accounting equation of purchasing merchandise on account includes a
- Increase in assets - Increase in liabilities
In a perpetual inventory system, which of the following statements are true?
- The seller should record freight-out as a selling expense - The purchaser should record freight-in as an asset, inventory
On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Using perpetual LIFO, ending inventory at May 31 equals ______.
220
Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.
302
Chicken Little started the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is
65
A decrease in Inventory will be ______ net income when determining net cash flow provided by ______ activities on the statement of cash flows.
Added back to: operating
The assumption that a company makes about its inventory cost flow has
An effect on the company's balance sheet and income statement
Independent Verification
Compare perpetual records to periodic physical counts of inventory
An increase in a company's inventory balance from a prior year is ______ if the inventory turnover ratio is
Desirable: higher
Which inventory costing method assumes that the inventory's cost flows out in the same order the goods are received?
FIFO
True or false: An error in ending inventory in Year 1 will cause ending inventory in Year 2 to be misstated as well.
False: The Year 2 ending inventory is based on a physical count and is thus not affected by the error made in Year 1. The error made in Year 1 is corrected (or offset) by misstating the Year 2 cost of goods sold.
FIFO, an inventory costing method, actually describes how to calculate the cost of
Goods sold
LIFO liquidation occurs when
Items from beginning inventory become part of cost of goods sold
Applying the lower of cost or net realizable value rule results in inventory being reported at the
Market value if lower than cost
In a perpetual inventory system, Inventory is reduced by
Purchase discounts
Which inventory system requires purchases of merchandise to be recorded in the inventory account instead of the purchases account?
The perpetual inventory system
The perpetual 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.
Specific identification is
an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item
In a perpetual inventory system, Inventory is initially recorded at
cost
Separate Duties
do not make one employee responsible for the accounting and handling of inventory
When inventory is sold, the cost of inventory is recognized as a
expense along with the related sales revenue.
When costs are rising and a purchase occurs after the last sale, cost of goods sold will be ______ using LIFO periodic than using LIFO perpetual.
higher
restrict access
limit the handling of inventory to authorized personnel only
Generally accepted accounting principles (GAAP) require that any company using LIFO
must report the FIFO value of the same inventory in the notes to the financial statements
FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.
oldest; newest
The periodic inventory system uses
separate accounts for these items and records the cost of goods sold at the end of the accounting period.
Inventory is expensed when
sold
An increase in Inventory will be ______ net income when determining net cash flow provided by operating activities.
subtracted from
True or false: GAAP requires companies to include in the notes FIFO values if LIFO is used and is significantly different.
true
Ending inventory errors in 2018 ___
will affect the 2019 goods available for sale but will not affect the 2019 ending inventory
Which of the following income statement line items are affected by the inventory method chosen?
- Income from operations - Gross profit - Income before income tax expense - Net income - Income tax expense
Which of the following would be found in a company that has an effective system of internal controls regarding inventory?
- Limit the access to inventory to authorized personnel only. - Inventory is stored in a protected area. - One employee is responsible for actual physical control over inventory while a different employee enters inventory information into the computer.
Which of these might cause the value of inventory to fall below its original cost?
- Obsolescence from going out of style - Damage - Increased competition
Assuming sales remain unchanged, if Cost of Goods Sold increases then
Gross Profit decreases
Which of the following statements are true?
- Using a different inventory accounting method leads to reporting a different amount for cost of goods sold. - Managers can choose the method of accounting for inventory cost (i.e., FIFO, LIFO, etc.) that best fits their business.