Chapter 8: Inventories: Measurement

Periodic Inventory

A separate freight-in account is used

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting.

LIFO

Another name for the LIFO reserve account is

LIFO allowance

Which inventory costing method matches each unit sold with its actual cost?

Specific Identification

True or false: Dollar-value LIFO allows a company to combine a large variety of goods into one pool.

True

(1) Inventory is _____

an asset

A LIFO liquidation occurs when inventory quantities ______.

decrease

The gross profit ratio is computed as gross profit divided by _____.

net sales

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been

$2,000 higher

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been Multiple choice question.

$2,000 higher

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016?

$723,600 -$758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016?

$758,200 -$815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

The dollar-value LIFO (DVL) method

-reduces the risk of liquidation of layers. -simplifies recordkeeping.

The cost of inventory includes

-the cost to bring inventory to its desired location -the cost to bring inventory to its desired condition -expenditures to acquire the inventory

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be

40% -Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($5 million -$3 million)/$5 million

The dollar-value LIFO (DVL) inventory method

Allows a broader range of goods to be included in pools

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

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.

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

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the highest cost of goods sold? Multiple choice question.

LIFO

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

LIFO

Which inventory costing method assumes that the units sold are the most recent units purchased?

LIFO

If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors.This is know as the

LIFO conformity rule

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

(1) The goods a wholesale company purchases in finished form are referred to as what?

Merchandise Inventory

FIFO

Most closes approximates the actual physical flow of inventory

Wholesale and retail companies

Purchase goods that are primarily in completed form

Manufacturing companies

Purchase goods that are used to produce another product

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale

Cost flow ______ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.

assumptions

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to

combine a large variety of goods in one pool.

The inventory turnover ratio is computed as _____ divided by average inventory.

cost of goods sold

The FIFO method assumes that units sold are the _________ units acquired and that units remaining in ending inventory are the ________ units purchased.

first; last

Perpetual inventory

freight is added directly to the inventory account

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

A JIT inventory system allows companies to maintain ______ inventory levels.

smaller

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

the oldest units in inventory

The _____ inventory method assumes that the units in ending inventory were the items acquired first.

last-in; first-out

(1) Finished goods is a type of inventory found on a ______ company's balance sheet

manufacturing

Finished goods is a type of inventory found on a _____ company's balance sheet.

manufacturing

Inventory for a ______ company consists of raw materials, work in process, and finished goods.

manufacturing

When a buyer returns goods to the seller, the buyer records a(n) _____ ______

purchase return

(3) At the end of an accounting period, it is important to ensure proper inventory _____ to determine the ownership of goods in transit.

cutoff

When a company returns inventory to the seller, net purchases ________

decrease

Companies closely monitor inventories to maintain a sufficient ________ of inventory to meet customer demand, while also controlling the ______ of carrying inventory.

quantity; cost

A DVL pool is made up of items

that are likely to have similar cost change pressures

The gross profit ratio is computed as _____ divided by net sales.

gross profit

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

FIFO

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____.

at the end of the period; each time goods are sold

Which inventory costing method assumes that cost of goods sold and ending inventory consist of a mixture of all the goods available for sale?

average cost

In a perpetual inventory system the inventory account is

continually adjusted

The _____ ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and then to provide a profit.

gross profit

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

inventory

The specific identification method of inventory costing matches each unit with

its actual cost

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

(2) A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs.

perpetual; perpetual

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the 2016 fiscal year would have been

$50,000 lower if it had used FIFO.

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2

The cost of freight-in paid by the purchaser is commonly included in which of the following?

Inventory cost

LIFO

Provides better matching of current revenues with current inventory cost

Which of the following situations would result in a LIFO liquidation for a company that has 200 units in beginning inventory and sales of 1,000 units?

The company purchases 950 units during the year.

The inventory turnover ratio is computed as cost of goods sold divided by _____. Multiple choice question.

average inventory

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

costs incurred several years earlier

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower -Currently cost of goods sold is computed using the 1,000 units at $20 plus 200 units at $10 so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been higher resulting in lower pretax income.

What type of expenditures should be included in the cost of inventory of a manufacturing company?

-Expenditures necessary to bring inventory to sales location. -Expenditures necessary to acquire inventory.

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

-To ensure that sufficient units are available. -To minimize costs of ordering and carrying inventory.

A just-in-time (JIT) inventory system

-allows companies to maintain relatively low inventory balances. -assists managers with inventory management.

A periodic inventory system

-does not continually track the cost of merchandise sold -does not continuously track the quantity of merchandise

Ownership of inventory at the end of the accounting period is determined for

-goods shipped by suppliers -goods shipped to customers

Inventory cost flow assumptions can be used to assign dollar amounts to

-goods sold -ending inventory

What is included in the cost of merchandise inventory?

-the purchase price of the goods -necessary costs incurred to get the goods in location for sale

In a perpetual inventory system the inventory account is adjusted

-when inventory is sold -when inventory is purchased

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

-work in process -finished goods -raw materials

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

LIFO

In which type of inventory costing system are inventory costs on the balance sheet generally out of date?

LIFO