ACCT 2010 Ch 6

Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler's ending inventory equals:

$15,000

Palmer Company's beginning inventory consists of 1,000 units at $1.00 per unit. During the year, the company purchases 5,000 units costing a total of $5,800. At the end of the accounting period, Palmer still has 1,000 units on hand. If Palmer uses the weighted average cost method, its cost of goods sold (rounded to the nearest dollar) will be

$5,667. Rationale: 5,000 x [(1,000 + 5,800)/6,000]

Adam Company has 100 units costing $300 in beginning inventory. During the year, the company purchases 900 units for a total cost of $2,880. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, the cost of ending inventory will be

$640. Rationale: $2,880/900 x 200 = $640

Bottom, Inc. paid an invoice for $1,000, with discount terms of 1/7, n/30, within the discount period. The net amount paid was:

$990

Which of the following statements is correct?

A company can apply more than one inventory cost flow assumption.

Inventory is classified as

A current asset

Inventory not yet sold is classified as a(n) _____ in the _____ _____.

Asset, Balance Sheet

The cost of unsold inventory at the end of the year is classified as a(n)_______ in the ___________ _________.

Asset, balance sheet

Where is inventory reported in the financial statements?

Balance sheet as a current asset

"Cost of sales" is another name for which of the following accounts?

Cost of goods sold

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

Cost of goods sold inventory

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

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

Direct labor Overhead Raw materials

When inventory is sold, the cost of inventory is recognized as a(n) _____

Expense

How is cost of goods sold classified in the financial statements?

Expense in the income statement

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

FIFO

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

Finished goods inventory

To calculate the amount in the inventory account, which of the following occurs?

Freight-in is added to the cost of inventory Purchase discounts are subtracted from the cost of inventory Purchase returns are subtracted from the cost of inventory

Freight-in is

Included as a cost of inventory

Which of the following items may be classified as nonoperating revenues and expenses for a company that manufactures televisions?

Interest revenue Gain from sale of land Interest 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

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

Inventory

The definition of inventory includes which of the following items?

Items currently in production for future sale Items held for resale Items 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

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

LIFO only

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

LIFO reserve

Which of the following methods are not used for inventory costing? (Select all that apply.)

NIFO Simple-average

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

Perpetual inventory system

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?

Rationale: $60,000 + $100,000 - $120,000 = $40,000.

Bern Company has 100 units costing $200 in beginning inventory. During the year, the company purchases 900 additional units for $1,980. At the end of the year, 200 units remain unsold. If Bern Company utilizes the LIFO method, cost of goods sold will be

Rationale: ($1,980/900 x 800) = $1,760

Which of the following sells inventory to end users?

Retailers

How is income tax reported on a multiple-step income statement?

Separately after non-operating revenues and expenses

The balance of the Cost of Goods Sold account at the end of the year represents:

The cost of inventory sold in the current year.

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

_____ resell inventory to retail companies or to professional users, whereas retailers sell inventory to end users.

Wholesalers

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

assets will increase.

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

average days in inventory

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

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

The LIFO difference (sometimes called LIFO reserve) helps investors

compare the performance of companies that use different cost flow assumptions.

The lower of cost and net realizable value method represents a(n) _____ approach in accounting.

conservatism

When a company adjusts its own FIFO inventory records at year-end to a LIFO basis for financial statements, the company must:

debit cost of goods sold credit inventory

Schoen Corporation internally accounts for its inventory using the FIFO cost flow assumption, but uses LIFO for external reporting. Its current year inventory ending balance under FIFO is $15,000; under LIFO, the ending balance would be $11,000. The journal entry to adjust FIFO to LIFO is:

debit cost of goods sold and credit inventory for $4,000

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

debit to Accounts Payable credit to Inventory.

Recording a write-down of inventory from cost to its lower net realizable value includes:

debit to Cost of Goods Sold credit to Inventory

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

finished goods

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

first

Correctly match the shipping costs with the accounting treatment.

freight in: added to the cost of inventory freight out: recognized as operating expense

Net sales revenue minus cost of goods sold is

gross profit.

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

included in Gerald's inventory.

Purchasing inventory on account:

increases assets increases liabilities

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

inventory turnover

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

inventory; selling expense

Peter Company, a produce distributer, always tries to sell its oldest produce first. Peter company

is allowed to use the FIFO, LIFO, or Weighted-average cost flow assumptions.

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

last

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

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.

more

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

Income before income taxes is calculated by combining operating income with

non-operating income

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

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

perpetual

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

raw materials

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

raw materials direct labor indirect manufacturing costs

The estimated selling price of inventory less costs necessary to sell the inventory is referred to as net _____ _____.

realizable value

Service companies _____ revenues when the service is provided to customers.

record

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

specific identification

The primary benefit of LIFO is:

tax savings

The LIFO inventory method assumes that the units sold are

the most recent units purchased.

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

the oldest units in inventory.

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

The lower of cost and net realizable value method causes losses in the value of inventory to be recognized in the period when

the value declines below cost.

Weighted-average unit cost is determined by dividing cost of goods available for sale by

total quantity available for sale.

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

unique products. very expensive products.

Berta Company's inventory value has declined during the current period. Berta does not expect to sell its inventory during the current year. Berta should recognize the loss in the period when the inventory

value declines.

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.

True or false: A company may use more than one inventory cost method.

True

True or false: Income tax expense may be disclosed either on the income statement or in the notes to the financial statements.

False

True or false: The inventory cost flow assumption must match the physical flow of inventory units.

False

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

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

Manufacturers

Companies that produce the inventory they sell are referred to as ______________.

Manufactures

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

Which of the following contributes to the importance of properly determining the cost of inventory and the cost of goods sold?

Inventory may be the largest asset on some companies' balance sheets Cost of goods sold may be the largest expense on some companies' income statement

Prather Inc. has sales of $100,000, sales returns of $5,000, cost of goods sold of $60,000, and selling expenses of $3,000. Calculate gross profit.

Rationale: Net sales is $95,000 ($100,000 - 5,000). Net sales of $95,000 less cost of goods sold of $60,000 = $35,000.

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

Consistent with International Financial Reporting Standards, which of the following cost flow assumptions are currently permitted?

FIFO, weighted-average

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

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.

Which of the following companies would be most likely to utilize the specific identification method?

Adams Company produces one-of-kind products.

Which of the following items are reported in operating income?

Advertising expenses Revenues Selling expenses

At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. The net realizable values are $1.20 per bottle for CleanZ and $8 per box for DyeZ. Using the lower of cost and net realizable value method, CurlZ should report its inventory at:

$1,000 The lower of cost and net realizable value method requires the DyeZ boxes be recorded at the lower selling price of $8 instead of the higher cost of $10. Thus, Inventory equals $1,000 = ((200 bottles x $1) + (100 boxes x $8)).

Bern Company has 100 units costing $200 in beginning inventory. During the year, the company purchases 900 additional units for $1,980. At the end of the year, 200 units remain unsold. If Bern Company utilizes the LIFO method, ending inventory will be

$420. Rationale: ($1,980/900 x 100) +$200 = $420

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 :

Compensation/bonus tied to reported income Meeting earnings targets Increases stock prices

Which of the following considerations may influence managers' choice of the FIFO inventory cost flow assumption for a company that experiences rising prices?

Compensation/bonus tied to reported income Meeting earnings targets Increases stock prices

Which of the following concepts or principles is especially relevant to the lower of cost and net realizable value rule?

Conservatism

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

Cost of goods sold and Inventory

The cost of the goods that a company sold during a period is shown in its financial statements as ___________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as __________.

Cost of goods; inventory

A periodic inventory system measures cost of goods sold by

Counting inventory at the end of the period

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

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

FIFO

Which of the following methods are available for costing inventory? (Select all that apply.)

FIFO Specific identification LIFO Weighted-average

Match the inventory cost flow assumptions on the left with the scenario on the right.

FIFO Most closely approximates the actual physical flow of inventory LIFO Provides better matching of current revenues with current inventory costs

Which of the following items are included in calculating operating income?

General and administrative expenses Cost of goods sold Utility expense

Janex Company manufactures refrigerators. Which of the following items is classified as nonoperating expense

Interest expense

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

Cost of goods sold divided by average inventory is

Inventory turnover

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

LIFO

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

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

Match the inventory cost flow assumption with the financial statement approach.

LIFO Income statement approach FIFO Balance sheet approach

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the _____ _____.

LIFO reserve

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

LIFO reserve

Which disclosure allows financial statement users to compare companies that use LIFO to companies that use FIFO?

LIFO reserve

Which of the following inventory cost flow assumptions is prohibited under International Financial Reporting Standards?

Last in, first out

Companies that produce the inventory they sell are referred to as _____.

Manufacturing

What type of companies recognize revenues when they sell inventory to customers?

Manufacturing companies Merchandising companies

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

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

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

Overhead

Adam Company has 100 units costing $300 in beginning inventory. During the year, the company purchases 900 units for a total cost of $2,880. At the end of the year, a physical count reveals that 200 units remain in ending inventory. If the company uses the FIFO method, cost of goods sold will be

Rationale: 800 units have been sold. 100 units from beginning inventory at $300 plus 700 units from the units purchased at $2,240 ($2,880/900 x 700) equals $2,540

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

Two Rationale: Two entries are required: One entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory.

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

Work in process

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

Work in process Raw materials Finished goods

The weighted average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

Freight charges are _____ to the cost of inventory, while purchase returns and purchase discounts are _____ from the cost of inventory by most companies.

added; deducted

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

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

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

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

If a company pays freight-in for its inventory, that amount will later be included in

cost of goods sold

The formula for inventory turnover is

cost of goods sold divided by average inventory.

Some companies refer to "cost of goods sold" as

cost of merchandise sold cost of sales cost of products sold

Freeze Corporation uses the lower of cost or net realizable value method to write down inventory. Freeze determines that the inventory should be written down by $1,000. The effect on the financial statements is to:

decrease assets decrease stockholders' equity decrease net income

The purchase discount term, 2/10, n/30, means that the purchaser ______.

has 10 days from the purchase date in which to pay and receive a 2% discount

A multiple-step income statement reports multiple levels of _____.

income

Combining operating income with non-operating revenues and expenses yields

income before income taxes

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

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

incurred several years earlier.

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be _____ than ending inventory determined using the FIFO inventory assumption.

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

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.

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

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

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

work-in-process

The specific identification method

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

Blog Inc., has net sales of $50,000, cost of goods sold of $30,000, and selling expenses of $5,000. Its gross profit is ______.

$20,000

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

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

Debit Inventory

Maier Company purchases inventory from Kunze Corporation and debits inventory and credits accounts payable to record the transaction. Which of the following journal entries would Kunze make to record the sale?

Debit accounts receivable, credit sales revenue

At year end, CurlZ Inc.'s inventory consists of 100 bottles of CleanZ with a cost of $1, and a selling price of $0.80 per bottle. It also has 100 boxes of DyeZ with a cost of $10, and a selling price of $11 per box. Using the lower of cost and net realizable value method, the year-end Inventory balance should include which of the following amounts?

The selling price of $80 for the CleanZ bottles. The cost of $1,000 for the DyeZ boxes.

Managers may want to report to use FIFO to report higher assets and profitability to satisfy shareholders or increase stock price.

True

True or false: Determining inventory-related amounts is very important because for some companies cost of goods sold represents the largest expense on the income statement.

True

The estimated selling price of inventory less any costs of completion, disposal, and transportation is referred to as:

net realizable value