chapter 6 MGMT review

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.

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

- assets increase by the sales price of the inventory - assets decrease by the cost of the inventory

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

- cost of goods sold - inventory

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

For internal record keeping, most companies carry their inventory using the _____ basis.

FIFO

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

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.

HIGEHR

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

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

LIFO reserve

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

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.

In a perpetual inventory system, freight costs on purchases are

added to the inventory account

In a periodic inventory system, purchase returns

are recorded in a separate contra purchases account

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

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

Where is inventory reported in the financial statements?

balance sheet as current asset

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

debit inventory

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

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 liabilities and 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

If a company uses the periodic inventory system, how many entries are made when a sale occurs?

one

When a sale occurs under the periodic inventory system, we record

only the sale, but not the related cost of goods sold

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming .

outdated

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

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

perpetual inventory system

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

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

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

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

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are

paid by supplier