SB 6

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO

Vogel Company maintains its inventory records using the FIFO assumption, but reports its inventory consistent with LIFO. At the end of the year, Vogel converts its inventory balance from FIFO to LIFO by using the

LIFO adjustment

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

LIFO reserve

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

Manufacturers

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

Merchandising, Merchant, Retail, Wholesale, or Merchandise

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

NIFO Simple-average

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

Which of the following costs are recognized in work in process for a manufacturing company?

Overhead Raw materials Direct labor

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

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

Meller purchases inventory on account. As a results, Meller's

assets will increase.

Net sales revenue minus cost of goods sold is

gross profit.

A multiple-step income statement reports multiple levels of

profit

The primary benefit of LIFO is:

tax savings

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

two

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

A company is most likely to utilize the specific identification method if its inventory consists of

very expensive products. unique products.

The specific identification method

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

Josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?

Debit Cost of Goods Sold $1,500; credit Inventory $1,500

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

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

Finished goods Work in process Raw materials

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

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

Beginning inventory is $20,000. Purchases of inventory during the year are $100,000. Ending inventory is $50,000. What is cost of goods sold?

$70,000 ($20,000 + $100,000 - $50,000 = $70,000.)

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

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

Work in process

The formula for inventory turnover is

cost of goods sold divided by average inventory.

Freight-in is

included as a cost of inventory.

Purchasing inventory on account:

increases liabilities increases assets

The Work-in-Process inventory account typically includes which costs?

indirect manufacturing costs raw materials direct labor

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

inventory

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

last

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

merchandising

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

specific identification

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

Which of the following companies would be most likely to utilize the specific identification method? -Adams Company produces one-of-a-kind products. -Carmen Company produces its products in 100,000-unit batches. -Barny Company purchases and sells a large quantity of interchangeable units.

Adams Company produces one-of-a-kind products.

Clark uses the perpetual inventory system. Clark sells goods to a customer on account for $1,000. The cost of the goods sold was $700. Which of the following entries are required?

Debit Cost of Goods Sold $700; credit Inventory $700 Debit Accounts Receivable $1,000; credit Sales Revenue $1,000

The _____ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

FIFO

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

LIFO

The cost flow assumption more realistically matches the current cost of inventory with current sales revenue.

LIFO

The primary benefit for choosing this method is that it tends to save taxes.

LIFO

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

Perpetual inventory system

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

_____ inventory refers to the products that have been started in production, but are still incomplete.

Work-in-process

Inventory is classified as

a current asset.

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 ratio that indicates the approximate number of days the average inventory is held is referred to as the:

average days in inventory

The formula 365 divided by the inventory turnover ratio equals the

average days in inventory.

Catalina Bookstore pays freight on books shipped to its store. The shipping cost is debited to Inventory. When the books are sold, the freight costs pertaining to the books are included in:

cost of goods sold

inventory consists of items for which the manufacturing process is complete.

finished goods

Which inventory account consists of the cost of items for which the manufacturing process is complete?

finished goods inventory

The FIFO method assumes that units sold are the _____ units acquired

first

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

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

included in Gerald's inventory.

Which of the following items are readily available from an inventory account under the perpetual inventory system?

individual purchases beginning inventory balance cost of units sold ending inventory balance

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

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

inventory turnover

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

Companies that produce the inventory they sell are referred to as

manufacturers

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

On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as _____ revenues and expenses.

nonoperating

Revenues and expenses arising from activities that are not part of the company's operations are classified as ______ revenues and expenses.

nonoperating

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

outdated

Raw materials, direct labor, and manufacturing _____ are the three costs related to the manufacturing of products.

overhead

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.

Freight-in on inventory purchases is typically recognized as

part of the cost of purchasing inventory.

Under the _____ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.

perpetual

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)

stockholders' equity increases net income increases total assets increase

Average days in inventory measures

the average time the inventory is held.

FOB destination means title to the goods passes

when they arrive at the destination.

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

FIFO

Which inventory cost flow method approximates the physical flow of inventory items?

FIFO

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

FIFO

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

Inventory Cost of Goods Sold

The definition of inventory includes which of the following items?

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

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

LIFO

When prices increase, the _____ inventory method tends to decrease a company's tax liability during a particular fiscal period.

LIFO

Which of the following methods are available for costing inventory?

Specific identification FIFO LIFO Weighted-average

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides.

Freight-in is recorded as part of ______, whereas freight out is often recorded as ______.

inventory; selling expense

inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

raw materials

Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production.

raw materials inventory

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Beginning inventory is $60,000. Purchases of inventory during the year are $100,000. Cost of goods sold is $120,000. What is ending inventory?

$40,000 ($60,000 + $100,000 - $120,000 = $40,000.)

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

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

inventory. cost of goods sold.

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

incurred several years earlier.