Chapter 6 Accounting
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: Multiple choice question.
$990
Where is inventory reported in the financial statements?
Balance sheet as a current asset
Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.
Cost of Goods Sold Inventory
Which of the following is a correct interpretation of the information provided by the gross profit ratio?
It measures the amount by which the inventory sale exceeds its cost.
Periodic inventory system
Sherman Company recognizes cost of goods sold after completing a physical inventory.
Which of the following represent reasons why managers closely monitor inventory levels?
To ensure that sufficient units are available. To minimize costs of inventory write-downs due to obsolete inventory.
Which of the following accounts would be found in the balance sheet of a manufacturing company?
Work in process
Inventory is classified as
a current asset.
The weighted average cost method assumes that cost of goods sold consists of
a mixture of all the goods available for sale.
The weighted average cost method assumes that ending inventory consists of
a mixture of all the goods available for sale.
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:
decrease an asset and increase an expense increase an asset and increase revenue
When inventory is sold, the cost of inventory is recognized as COGS or a(n) ___________
expense
he FIFO method assumes that units sold are the _______ units acquired
first
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
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.
higher
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.
higher
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
Cost of goods sold divided by average inventory is
inventory turnover
The ___________ ratio shows the number of times the firm sells its average inventory balance during a reporting period.
inventory turnover
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
In times of rising prices, ending inventory determined using the LIFO inventory assumption will be ________ than ending inventory determined using the FIFO inventory assumption.
lower
The inventory turnover ratio directly measures ______.
the times per period the average inventory balance is sold
In a perpetual inventory system, when a company sells inventory on account, how many entries are required?
two
Periodic inventory system
Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.
Accounting errors must be corrected
as soon as they are discovered.
Inventory not yet sold is classified as a(n) ______ in the _______ ________
asset, balance sheet
Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.)
cost of goods sold. inventory
Gross profit divided by net sales equals
gross profit ratio.
Items held for sale in the normal course of business are referred to as
inventories
Items held for sale in the normal course of business are referred to as _________
inventories
Using the perpetual inventory system, what is the effect of a sale of inventory on assets?
assets decrease by the cost of the inventory assets increase by the sales price of the inventory
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
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.
Which of the following methods are available for costing inventory?
LIFO, Specific identification, FIFO, Weighted-average
Purchasing inventory on account:
increases liabilities increases assets
In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs
incurred several years earlier.
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
Companies that produce the inventory they sell are referred to as ________
manufacturers
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
True or false: The inventory cost flow assumption must match the physical flow of inventory units. True false question.
False
Which of the following accounts are typically reported in the balance sheet of a manufacturing company?
Finished goods Work in process Raw materials
____________ companies purchase inventory that is primarily in finished form and ready for resale to customers.
Merchandising
LIFO
Provides better matching of current revenues with current inventory cost
The specific identification method
matches each unit of inventory with its actual cost would be beneficial to a company that makes fine jewelry
FOB destination means title to the goods passes
when they arrive at the destination.
Which inventory costing method assumes that the inventory's costs flow out in the same order the goods are received?
FIFO
True or false: The inventory cost flow assumption must match the physical flow of inventory units.
False
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
When prices increase, the __________ inventory method provides the best matching of revenue and expenses.
LIFO
Perpetual inventory system
Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.
Perpetual inventory system
Peter Company recognizes cost of goods sold each time it recognizes a sale.
Which of the following methods are not used for inventory costing? (Select all that apply.)
Simple-average NIFO
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
Meller purchases inventory on account. As a results, Meller's
assets will increase.
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 formula for inventory turnover is
cost of goods sold divided by average inventory.
The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.
specific identification
The shipping term FOB stands for
free on board
A multiple-step income statement reports multiple levels of
profitability
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?
FIFO
Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?
FIFO
What type of company purchases raw materials and makes goods to sell?
Manufacturers
The definition of inventory includes which of the following items?
Materials used currently in the production of goods to be sold Items held for resale Items currently in production for future sale
FIFO
Most closely approximates the actual physical flow of inventory
Gross Profit is
Net Sales Revenue minus Cost of Goods Sold.
Net sales revenue minus cost of goods sold is
gross profit
The gross profit ratio is calculated as
gross profit divided by net sales.
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.
higher
Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error
immediately
Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are
included in Gerald's inventory.
Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.
merchandising
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
Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming ________
old
Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming _________.
old
Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are
paid by the supplier
What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)
total assets increase net income increases stockholders' equity increases
FOB shipping point means title to the goods passes
when they are shipped.