Accounting Chapter 06

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

Cost of Goods Sold Inventory

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

FIFO

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

LIFO reserve

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

assets will increase

Where is inventory reported in the financial statements?

balance sheet as a current asset

Under a perpetual inventory system, the entry to record the return of goods previously purchased on account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is:

correct

If a company uses a perpetual inventory system, the entry to record the company's return of goods previously purchased on account includes ______ and _____.

credit to Inventory. debit to Accounts Payable

Inventory is classified as

current asset

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

debit to inventory

Net sales revenue minus cost of goods sold is

gross profit

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 (greater, more, larger)

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

included in Gerald's inventory.

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

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

inventory (inventories)

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 (smaller, less)

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

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

manufacturers

The specific identification method:

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

Gross Profit is

net sales - cost of goods sold

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

outdated

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

paid by the supplier.

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

perpetual inventory system

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

specific identification

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

two

FOB shipping point means title to the goods passes

when they are shipped.

FOB destination means title to the goods passes

when they arrive at the destination.

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

work in process

The specific identification method (select all that apply):

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

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the

LIFO reserve

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

FIFO

Purchasing inventory on account:

increases liabilities increases assets

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

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

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

incurred several years earlier.

Companies that produce the inventory they sell are referred to as

manufacturers

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

merchandising

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

merchandising

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

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

The definition of inventory includes which of the following items?

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

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

LIFO

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

LIFO (last in first out)

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

LIFO only

Perpetual inventory system Periodic inventory system

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

Bernie Corp uses the FIFO inventory method to calculate cost of goods sold for financial reporting purposes. Which of the following methods can Bernie use for tax purposes?

FIFO and weighted-average only

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

Finished goods Work in process Raw materials

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

Inventory Costs of Goods Sold

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.