ACCT ch7

The assumption that a company makes about its inventory cost flow has ______. (Check all that apply.)

- an effect on the company's balance sheet - an effect on the company's income statement

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

Inventory is reported on the ______. Later, when the inventory is sold, it becomes ______.

balance sheet as a current asset; Cost of Goods Sold on the income statement

An understatement of the 2019 ending inventory will affect ______. (Check all that apply.)

- 2019 Cost of Goods Sold - 2020 Beginning Inventory - 2020 Cost of Goods Sold

FIFO, LIFO, and weighted average inventory costing methods are based on ______.

assumptions that accountants make about the flow of inventory costs

In a perpetual inventory system, Inventory is initially recorded at ______.

cost

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 last-in, first-out, the 3 goods sold are ______.

from the purchases made during the month NOT: the ones that were actually sold and cannot be determined from the information provided (Reason: This is the case for specific identification, not LIFO)

What effect does the inventory costing method have on the income statement? The inventory methods affects the amount of the ______.

Cost of Goods Sold, Gross Profit, Income from Operations, Income before Income Tax Expense, Income Tax Expense and Net Income

On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under the _____________ __________________ inventory method, cost of goods sold would equal $75.

specific identification

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 last-in, first-out, Cost of Goods Sold equals ______.

$33

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchased 3 more at $12 each. What is the weighted average cost per unit?

$11.20 Reason: The weighted average cost =((2 x $10) + (3 x $12))/5

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using FIFO, its Cost of Goods Sold for the year ended is ______.

$500

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

$550 (Reason: Specific identification records the actual cost of the actual diamond sold. The diamond that was purchased on July 9 cost $550)

The weighted average cost method uses the weighted average cost to calculate the value of ______. (Check all that apply.)

Cost of Goods Sold Inventory

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs? (Check all that apply.)

FIFO LIFO

Which statement are true? - The inventory methods apply to both perpetual and periodic inventory systems. - The inventory costing methods determine the amount of the debit to Cost of Goods Sold and credit to Inventory. - Specific identification, weighted average cost, LIFO and FIFO are generally accepted costing methods. - The inventory method used must correspond with the actual physical flow of goods.

The inventory methods apply to both perpetual and periodic inventory systems. The inventory costing methods determine the amount of the debit to Cost of Goods Sold and credit to Inventory. Specific identification, weighted average cost, LIFO and FIFO are generally accepted costing methods.

Inventory is reported as a(n) ______.

current asset on the balance sheet

Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross Profit ______________.

decreases

to ensure the accuracy of inventory accounted for using a perpetual system, physical counts ______. (Check all that apply.)

detect theft detect bookkeeping errors detect shrinkage

An increase in a company's inventory balance from a prior year is ______.

good if the inventory turnover ratio is higher

FIFO, an inventory costing method, actually describes how to calculate the cost of ______.

goods sold

The goals of inventory managers include ______.

making sure that inventory quality meets customer expectations having enough inventory on hand to meet customer demand keeping the costs of buying and storing inventory as low as possible

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

____________ inventory consists of products acquired in a finished condition, ready for sale without further processing.

merchandise

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest; newest

Inventory shrinkage as a result of theft, damage or obsolescence that is discovered during a physical inventory count at the end of the accounting period is recorded with a decrease to Inventory ______.

only in a perpetual system

Which inventory method is typically used when accounting for expensive and unique inventory items?

specific identification

The costs of carrying inventory include the costs of ______.

spoilage theft obsolescence storage

Who decides which of the many inventory accounting methods a company should use?

the company's management

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Ending inventory errors in 2019 ______.

will affect the 2020 goods available for sale but will not affect the 2020 ending inventory

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased 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 a periodic specific identification, its Inventory after the December 24 sale is ______.

$2,250 (Reason: Inventory equals $2,250 (=$500 + 550 + (2x$600)). Cost of Goods Sold equals $550)

Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using FIFO, its Inventory at December 31 is ______.

$2,300

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing Income Tax Expense to differ.

True or false: Accounting rules allow companies to choose, from a variety of methods, the inventory method that best fits their business environment.

true

Which of these might cause the value of inventory to fall below its original cost? (Check all that apply.)

Damage Increased competition Obsolescence from going out of style

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

LIFO

If a new company calculates the average cost of its inventory by adding together the total cost of all purchases and then dividing it by the number of units purchased during the period, it is using the weighted ___________ cost method.

average

The weighted average cost method uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

average; average