chapter 6
average inventory =
(beginning inventory + ending inventory) / 2
When does the cost of inventory become an expense? A) When inventory is delivered to a customer B) When inventory is purchased from the supplier C) When payment is made to the supplier D) When cash is collected from the customer
A
Which statement is true? A) Gross profit is the excess of sales revenue over cost of goods sold. B) Purchase returns and allowances increase the net amount of purchases. C) The Sales account is used to record only sales on account. D) A service company purchases products from suppliers and then sells them.
A
ABC Furniture Unlimited sells antique furniture. ABC will most likely use the ________ method to cost its ending inventory. A) Last-in, first-out B) Specific-unit-cost C) Average D) First-in, first-out
B
The cost of inventory that is still on hand is called: A) inventory, a longminus−term asset that appears on the balance sheet. B) inventory, a current asset that appears on the balance sheet. C) purchases, a current asset that appears on the balance sheet. D) cost of goods sold, an expense that appears on the balance sheet.
B
Another term for gross profit is: A) gross sales B) gross income C) gross margin D) gross operating income
C
Which is the CORRECT order for items to appear on the income statement? A) sales revenue, operating expenses, gross profit, net income B) sales revenue, gross profit, cost of goods sold, operating expenses C) sales revenue, cost of goods sold, gross profit, operating expenses D) sales revenue, gross profit, net income, operating expenses
C
Cost of goods sold will appear on which financial statement? A) statement of retained earnings B) balance sheet C) statement of cash flows D) income statement
D
Under the averageminus−cost inventory method, to determine the average cost per unit: A) the cost of purchases for the period are divided by the number of units available. B) the cost of beginning inventory is divided by the number of units available. C) the cost of beginning inventory plus the cost of purchases is divided by the number of units sold. D) the cost of beginning inventory plus the cost of purchases is divided by the number of units available.
D
How is inventory classified in the financial statements? A) As an expense B) As a contra account to Cost of Goods Sold C) As a revenue D) As a liability E) As an asset
E
TRUE OR FALSE - The choice of an inventory costing method does not impact a company's balance sheet
FALSE
TRUE OR FALSE - service entities report cost of goods sold on the income statement
FALSE
TRUE OR FALSE - Cost of Goods sold is an operating expense on the income statement
False
FIFO
Maximizes reported income
average cost per unit =
cost of goods available / number of units available
inventory turnover =
cost of goods sold / average inventory
LIFO
enables a company to buy high-cost inventory at year-end and thereby decrease reported income and income tax
LIFO
generally associated with saving income taxes
gross profit percentage =
gross profit / net sales revenue
LIFO
matches the most current cost of goods sold against sales revenue
cost of goods sold =
number of unites of inventory sold x cost per unit of inventory
sales revenue =
number of units of inventory sold x sale price per unit of inventory
Average-Cost
provides a middle ground measure of ending inventory and cost of goods sold
FIFO
results in a cost of ending inventory that is close to the current cost of replacing the inventory
LIFO
results in an old measure of the cost of ending inventory
gross margin =
sales revenue - cost of goods sold
LIFO
the method of inventory valuation that is disallowed by IFRS
ending inventory =
unit cost x number of units on hand
Specific-Unit-Cost
used to account for automobiles, jewelry, and art objects
Applies to all four inventory methods
writes inventory down when current replacement cost drops below historical cost