Chapter 6

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

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

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

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

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

inventory COGS

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

FIFO

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

FIFO

The definition of inventory includes which of the following items?

Items used currently in the production of goods to be sold Items currently in production for future sale Items held for resale

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

LIFO

Which of the following methods are available for costing inventory? (Select all that apply.)

LIFO Specific identification Weighted-average FIFO

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

LIFO reserve

FIFO

Most closely approximates the actual physical flow of inventory

Which of the following methods are not used for inventory costing? (Select all that apply.)

NIFO, Simple average

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

Perpetual inventory system

LIFO

Provides better matching of current revenues with current inventory cost

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

Raw materials Finished goods Work in process

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

Work in process

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

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.

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

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory.

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.

FOB destination means title to the goods passes

when they arrive at the destination.