Ch 8 Smartbook

The cost of inventory includes

-expenditures to acquire the inventory -the cost to bring inventory to its desired location

The terms 5/15, n/45 mean what?

A 5% purchase discount if payment is made within 15 days.

Inventory is _____.

an asset

The cost of freight-in paid by the purchaser is most commonly included in the cost of _____.

inventory

High recordkeeping costs and possible LIFO liquidation are disadvantages of

unit LIFO.

LIFO

A company can use all

Dollar amounts are assigned to goods sold and goods remaining in ending inventory by making an assumption regarding what?

How units of goods and their associated costs flow through the system.

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

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 goods a wholesale company purchases in finished form are referred to as what?

Merchandise inventory

The cost of goods sold equation assumes that all inventory not on hand at the end of the period was sold and does not account for damaged or stolen merchandise. This is a disadvantage in which type of inventory system?

Periodic

Advantages of using LIFO inventory pools include which of the following?

Simplify recordkeeping Reduce the risk of LIFO layer liquidations

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

The measurement of inventory and cost of goods sold starts with determining the physical quantities of goods in which of the following systems?

both the periodic and perpetual inventory system

In a periodic inventory system, the inventory account during the accounting period reflects

cost of beginning inventory.

The inventory turnover ratio is computed as ______ divided by average inventory.

cost of goods sold

What account is used to expense product costs?

cost of goods sold

When a company utilizes a periodic inventory system, a physical count is necessary to determine cost of goods sold because

cost of goods sold is not determined at the time of sale.

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

costs incurred several years earlier.

Under the _____ inventory system, purchase discounts are treated as a reduction in the inventory account.

perpetual

Those costs that are included in inventory are referred to as _____ costs.

product

If goods are shipped f.o.b. destination, the _____ usually is responsible for shipping.

seller/ supplier

A JIT inventory system allows companies to maintain ______ inventory levels.

smaller

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.

Raw materials inventory consists of the cost of units that

will be used as components of a manufactured product

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 periodic LIFO method, cost of goods sold will be

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

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer?

2 100K/50K

Terms like 2/10, n/30 represent what?

A purchase discount

If a company uses LIFO to measure its taxable income, the IRS requires that LIFO also be used to measure income reported to investors and creditors. This is know as the

LIFO conformity rule.

Which inventory costing method matches each unit sold with its actual cost?

Specific identification

Which factors may influence a company's choice of inventory cost flow assumption?

actual physical flow of inventory tax implications of choice financial statement effect

Arranging for another company to sell a company's products is referred to as a(n) _____.

consignment, consigning, or consign

In a perpetual inventory system the inventory account is

continually adjusted.

A periodic inventory system

does not continuously track the cost of merchandise sold. does not continuously track the quantity of merchandise.

Inventory cost flow assumptions can be used to assign dollar amounts to

ending inventory. goods sold.

The FIFO method assumes that units sold are the ______ units acquired and that units remaining in ending inventory are the ______ units purchased.

first; last

The ______ ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and then to provide a profit.

gross profit

Which of the following cost flow assumptions currently are acceptable under U.S. GAAP?

last-in, first-out weighted average first-in, first-out

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year.

layer; base

If goods are shipped f.o.b. shipping point, at time of shipment

legal title passes to the buyer.

A ______ inventory system recognizes cost of goods sold each time a sale occurs; a ______ inventory system decreases inventory each time a sale occurs. Multiple choice question.

perpetual; perpetual

What method of inventory valuation matches each unit on hand at the end of the period with its actual cost?

specific identification

In a period of rising prices, LIFO produces a higher cost of goods sold, lower net income and therefore, lower _____ liability.

tax

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

work in process

A(n) _____ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise.

perpetual

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 periodic LIFO method, ending inventory will be

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

Pernell Company reported LIFO reserves of $150,000 and $100,000 in Year 2 and Year 1, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the Year 2 fiscal year would have been

$50,000 higher if it had used FIFO.

What is required at the end of a reporting period in a periodic inventory system?

A physical count of the period's ending inventory so an adjustment can be made.

Suppose that Michale Company operates in an environment of rising prices and utilizes the periodic inventory system. If the company were to use the LIFO inventory method, its cost of goods would be $500,000; if it were to use the FIFO method, its cost of goods sold would be $400,000. Based on this information, which of the following predictions would be correct with respect to the weighted-average cost method? Multiple choice question.

Cost of goods sold would be between $400,000 and $500,000.

True or false: The impact on reported income numbers is an important consideration when choosing an inventory cost flow method.

True Reason: Inventory cost method can have an impact on how well costs are matched with associated revenues and impact the timing of income and income tax expense.

True or false: LIFO, FIFO, and the weighted average inventory costing methods are all allowed under U.S. GAAP.

True Reason: U.S. GAAP permits the use of all three while IFRS does not permit the use of LIFO.

The amount of cost of goods sold determined under the average cost method typically

falls between the amounts determined using LIFO and FIFO.

Steiner Company's average days in inventory has decreased during the current year as compared to the prior year. From this information, we can conclude that Steiner

is selling its inventory faster. has a higher inventory turnover ratio.

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

last in, first out

The ______ inventory method assumes that the units in ending inventory were the items acquired first.

last-in, first-out

Use of LIFO inventory pools reduces the chance of unintentional LIFO layer _____.

liquidation

In a periodic inventory system, the inventory account is ______ and cost of goods sold is recorded ______.

not adjusted as purchases and sales are made; at the end of the reporting period

Work-in-process contains costs of inventory items that are

not yet complete.

When a buyer returns goods to the seller, the buyer records a(n) _____ _____ .

purchase return

Companies closely monitor inventories to maintain a sufficient ______ of inventory to meet customer demand, while also controlling the ______ of carrying inventory.

quantity; cost

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

raw materials work in process finished goods

The seller views returns as a reduction of net ______; the buyer views returns as a reduction of net ______.

sales; purchases

In a consignment, a company arranges for another company to

sell its products.

A significant disadvantage of the periodic inventory system is that it assumes that quantities not on hand at the end of the period were ______.

sold

Which of the following items should be classified as inventory for a company that manufactures accounting textbooks?

textbooks ready to be shipped to bookstores paper used in the printing process

A DVL pool is made up of items

that are likely to have similar cost change pressures.

Daryl Corp. purchases 10,000 units of inventory on account for $50,000. Two days after receiving the inventory, Daryl discovers that 1,000 units are defective and returns the defective units to the vendor. The company utilizes a perpetual inventory system. As a result of this return,

the accounts payable balance decreases. the inventory balance decreases.

Analyzing changes in the inventory _____ ratio can provide information about the quality of current period earnings.

turnover

Which of the following are disadvantages of unit LIFO?

Possibility of LIFO liquidation Significant recordkeeping costs

Pernell Company reported LIFO reserves of $150,000 and $100,000 in Year 2 and Year 1, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's cost of goods sold for the Year 2 fiscal year would have been Multiple choice question.

$50,000 lower if it had used FIFO.

FIFO LIFO

Most closely approximates the actual physical flow of inventory Provides better matching of current revenues with current inventory cost

A slowing turnover ratio combined with higher than normal inventory levels may indicate which of the following?

Potential for decreased production Potential for inventory becoming obsolete

Which of the following items should be classified as inventory for a company that manufactures beach umbrellas?

The canvas used in the production of the umbrellas. The finished umbrellas ready for sale.

The dollar-value LIFO (DVL) inventory method

allows a broader range of goods to be included in pools.

The gross profit ratio is computed as ______ divided by net sales.

gross profit

On December 31, Salz Company sells 1,000 units of merchandise to Wein Corp. and 2,000 units to Torr Corp. Shipping terms are f.o.b. destination for the 1,000-unit sale and f.o.b. shipping point for the 2,000-unit sale and the goods have shipped. If Salz still has 10,000 physical units in its inventory after these sales, how many units should Salz include in its ending inventory on December 31?

11,000 units Reason: The 10,000 units in ending inventory plus the 1,000 units shipped f.o.b. destination are included in Salz's inventory

Smith Company purchases merchandise for $10,000. The payment terms are stated as 2/10, n/30. If the company utilizes the net method to record purchases, the merchandise will be recorded at what amount?

$10,200 Reason: $10,000 x 2% = 200 discount

Pernell Company reported LIFO reserves of $150,000 and $100,000 in Year 2 and Year 1, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that at the end of Year 2, Pernell's ending inventory would have been

$150,000 higher if it had used FIFO.

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been Multiple choice question.

$2,000 higher.

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been

$2,000 lower. Reason: Currently cost of goods sold ($22,000) is computed using the 1,000 units at $20 plus 200 units at $10 ((1,000 x $20) + (200 x $10))so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been $24,000 (1,200 x $20); $2,000 higher; resulting in lower pretax income of $2,000.

Smith Company adopted dollar-value LIFO (DVL) as of January 1, when it had an inventory of $690,000. Its inventory as of December 31, of the same year was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31?

$723,600 $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Western Company adopted dollar-value LIFO (DVL) as of January 1, when it had an inventory of $715,000. Its inventory as of December 31, of the same year was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31? Multiple choice question.

$758,200 815,400 / 1.08 = 755K 755K x 8% = 60.4K (815.4K - 715K) - 60.4K= 40K 40K x 1.08 = 43.2K 43.2K + 715K = 758.2K

If a company has a policy of not including shipping charges in cost of goods sold, which of the following must occur?

Both the amount of freight-out charges incurred during the period and the income statement classification of charges must be disclosed.

In a periodic inventory system, purchase returns are closed to what account at the end of the reporting period?

Cost of goods sold

What is the first step in measuring inventory and cost of goods sold?

Determining the physical quantities of goods.

What type of expenditures should be included in the cost of inventory of a manufacturing company?

Expenditures necessary to bring inventory to sales location. Expenditures necessary to acquire inventory.

Assuming that prices increase, which of the following inventory methods results in lower costs of goods sold?

FIFO

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

FIFO

Which inventory costing method assumes that items in ending inventory are the most recently acquired?

FIFO

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

FIFO Reason: In a period of rising prices, FIFO results in goods with the lowest cost being sold first resulting in the lowest cost of goods sold

The LIFO reserve shows how ending inventory would have differed if the company had utilized ______ or ______, instead of LIFO

FIFO weighted-average

Many companies maintain their internal records using ______ or the average cost method, but use ______ for external reporting and income tax purposes.

FIFO; LIFO

True or false: The LIFO inventory cost flow method most often mirrors the physical flow of inventory.

False Reason: FIFO typically approximates the physical flow of inventory.

True or false: Goods shipped f.o.b. destination are included in the purchaser's inventory while the goods are in transit.

False Reason: Title of goods with f.o.b. destination shipping terms transfer when the goods reach the purchaser.

True or false: The LIFO method of inventory valuation is permitted under U.S. GAAP and IFRS.

False Reason: IFRS prohibits the use of LIFO under IAS No. 2.

Items a company intends to sell in the normal course of business, has in production for future sale, or uses currently in production, are all examples of what?

Inventory

Which of the following is a correct interpretation of the information provided by the gross profit margin?

It indicates the percentage of each sales dollar available to cover other expenses.

If a company uses ______ to measure taxable income, they must use the same method for external financial reporting.

LIFO

In which type of inventory costing system are inventory costs on the balance sheet generally out of date?

LIFO

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

LIFO Reason: In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold.

Wholesale and retail companies Manufacturing companies

Purchase goods that are primarily in completed form. Purchase goods that are used to produce another product.

The cost of components purchased from outside companies that will become part of the finished product are referred to as what?

Raw materials

Where can freight-out charges be found?

Selling expenses Cost of goods sold

Which of the following could motivate a company that uses LIFO for external reporting to use another method for internal recordkeeping?

The high recordkeeping cost of LIFO. Contractual agreements such as bonus contracts.

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

To minimize costs of ordering and carrying inventory. To ensure that sufficient units are available.

True or false: Dollar-value LIFO allows a company to combine a large variety of goods into one pool.

True Reason: DVL extends the concept of inventory pools and allows various goods to be combined into one pool.

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Its inventory balance was $250,000 at the beginning of the accounting period and $300,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

11 $3M/($250,000+$300,000/2)=10.9 rounded to 11

Parker Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Its inventory balance was $150,000 at the beginning of the accounting period and $200,000 at the end of the accounting period. The company's inventory turnover ratio is closest to

20 $3.5M/($150,000+$200,000/2)

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be

40% ($5 million -$3 million)/$5 million Reason: Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales.

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

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

The average cost method assumes that cost of goods sold consists of

a mixture of all the goods available for sale.

The average cost method assumes that ending inventory consists of

a mixture of all the goods available for sale.

In a periodic inventory system, purchase returns

are recorded in a separate contra purchases account.

A just-in-time (JIT) inventory system

assists managers with inventory management. allows companies to maintain relatively low inventory balances.

Determining ownership of goods that are in transit at the end of the accounting period is important to

assure proper inventory cutoff.

A periodic inventory system allocates cost of goods available for sale ______; a perpetual inventory system allocates cost of goods available for sale ______.

at the end of the period; each time goods are sold

At the end of an accounting period, it is important to ensure proper inventory ______ to determine the ownership of goods in transit.

cutoff

When inventory quantities ______ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system.

decline

A LIFO liquidation occurs when inventory quantities ______.

decrease

When a company returns inventory to the seller, net purchases ______.

decrease

The inventory turnover ratio shows

how many times the average inventory balance is sold during the current reporting period.

The _____ method of recording purchase discounts, subtracts the discount from total purchases to determine net purchases.

net

Which of the following methods are acceptable in accounting for purchase discounts?

net method gross method

The gross profit ratio is computed as gross profit divided by

net sales

A physical count of inventory is necessary in a(n) _____ inventory system to determine cost of goods sold.

periodic

A(n) _____ inventory system adjusts inventory at the end of each reporting period.

periodic

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

If goods are shipped f.o.b. destination, at time of shipment

the seller still has legal title of the goods.

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

unique products. very expensive products.

Inventory costs that relate to products that are not yet complete are shown in

work-in-process inventory.

The dollar-value LIFO (DVL) method

-simplifies record keeping -reduces the risk of liquidation of layers

Finished goods is a type of inventory found on a ______ company's balance sheet. Multiple choice question.

manufacturing

The specific identification method

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