Accounting Financial Chapter 7

Mountain Made started the month with 3 quilts in it beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remain unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is _____.

18 quilts * $210

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record ______.

Cost of Goods Sold, which will be reported on the income statement A decrease in its inventory

Of the 4 companies listed below, which company is more likely to use specific identification to value its inventory and cost of goods sold? Custom home builder Dog biscuit manufacturer Fast food restaurant Bulk candy merchandiser

Custom home builder

If you had 1 unit that cost $3 in the beginning inventory, purchased 1 more at $2 and then later another at $1, which method would result in the higher Cost of Goods Sold and lower Gross Profit if you sold 2 of the units?

FIFO

Which method will result in the same Cost of Goods Sold amount whether it is computed using the periodic inventory system or the perpetual inventory system?

FIFO

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO LIFO

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. List from top to bottom, in order of highest ending inventory to lowest ending inventory value.

FIFO Weighted average LIFO

True or false: GAAP requires that a business must use an inventory accounting method that is the same as the physical flow of goods in and out of the business

False

As inventory quality increases, its cost usually

increases

Goods in transit are _____

inventory items being transported from a seller to a buyer

Acme Company's balance sheet shows three inventory accounts—raw materials, work in process, and finished goods. Acme Company must be a:

manufacturer

If a company uses LIFO for tax reporting purposes, then it

must have used LIFO for financial reporting purposes, most likely has been experiencing rising inventory costs

Gross Profit is

net sales - cost of goods sold a subtotal on the income statement

The inventory turnover measures the

number of times the average inventory balance is bought and sold

goods in transit that have terms FOB destination should be included in the _____ inventory

seller's

Which of these will require a credit to the inventory account in a perpetual inventory system?

Selling inventory for cash Selling inventory on account

What may cause inventory turnover ratios to vary significantly between companies in the same industry?

Some companies may sell more lower-cost goods. Some companies may sell fewer higher-cost goods.

Which of these inventory accounting methods are acceptable under US GAAP?

Specific identification, LIFO, FIFO, Weighted average

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts _____.

detect bookkeeping errors detect shrinkage detect theft

Beginning inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, the 3 goods sold are assumed to be _____.

from the beginning inventory

Which of the following is merchandise inventory?

goods held for sale in the normal course of business

Which of the following may occur with a higher inventory turnover rate?

Reduction in Inventory storage costs Reduction in obsolescence

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 purchases at $14 each. Using perpetual FIFO the Cost of Goods Sold for the month ended May 31 equals

$124 (using perpetual LIFO, ending inventory at May 31 = $220)

Delta Diamonds had a 5 one-carat diamonds available for sale this year: 1 purchased on June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds that was purchased on July 9. Using perpetual specific identification, its Inventory after the December 24 sale is _____.

$2,250 (Cost of Goods Sold: 560) (Inventory at December 31: 2,300) (ending inventory 2,200)

Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first-in, first-out, Cost of Goods Sold equals

$30

Beta Company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is _____

((80*12)+(20*12.5))/100 12.10

Barry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals______ days

36.5

Acme, Inc. had cost of goods sold of $2,000. If beginning inventory was $2,100 and ending inventory was $500, Acme's purchases must have been $______.

400

If vito, inc. has an inventory turnover ratio of 5 times, then its days to sell must be

73 days

Which of these would explain an increase in a company's inventory turnover ratio?

An increase in the demand for the company's products A decrease in total inventory

In a periodic system, for Cost of Goods Sold to be updated, which of the following must occur?

Compute Cost of Goods Sold sold by subtracting Ending Inventory for Goods Available for Sale Take a physical count of inventory

If cost of acquiring inventory is rising, LIFO will result in which of the following compared to FIFO?

Income Tax Expense will be lower Cost of Goods Sold will be higher Gross Profit will be lower

Which of the following income statement line items are affected by the inventory method chosen?

Income from Operations, Net Income, Gross Profit, Income before Income Tax Expense, Income Tax Expense

Which financial statements are needed to calculate the inventory turnover ratio?

Income statement Balance sheet

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ______ and inventory on its ______.

Income statement, balance sheet

Which of the following statements concerning inventory is correct?

Inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date.

If a company assumes that its inventory costs flow out in the opposite order from which of the goods were purchased, it uses _____ to value its inventory.

LIFO

In times of rising prices, why would a company choose LIFO over FIFO?

LIFO would result in a higher Cost of Goods Sold making the Income Tax Expense lower than FIFO

Which of the following statements are true? Using a different inventory accounting method leads to reporting a different amount for cost of goods sold. It doesn't matter which method you use to account for inventory as long as it mimics the actual physical flow of goods Managers can choose the method of accounting for inventory cost (i.e., FIFO, LIFO, etc.) that best fits their business. GAAP require that all companies in the same industry use the same method of accounting for inventory

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.

Rank in order, from highest (top) to lowest (bottom), the anticipated inventory turnover ratios for the following companies.

WalMart Tiffany & Co. (exclusive jewelry store) Bath Iron Works (sells battle ships to the US government)

What inventory accounts would one expect to see in the accounting records of a company that makes furniture?

Work in process inventory Raw materials inventory Finished goods inventory

Which of the following statements are true? (Check all that apply.) a. an increased inventory balance is desirable if the resulting inventory turnover ratio is lower b. an increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory c. an increased inventory balance is desirable if management is building up stock in anticipation of higher sales

b & c

Goods in transit that have terms FOB shipping point should be included in the _____ inventory

buyer's

______ inventory refers to goods a company is holding on behalf of the actual owner of the goods. The company is willing to try to sell the goods for the owner for a fee.

consignment

The weighted average cost method uses the weighted average cost to calculate the value of _____.

cost of goods sold, inventory