chapter 7: inventory and cost of goods sold

beta company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. it sold 90 units for $25 each. beta's weighted average cost is _____

$12.10 Weighted average=((80 x $12) + (20 x $12.50))/100

FIFO, LIFO, and weighted average inventory costing methods are based on _____

assumptions that accountants make about the flow of inventory costs

inventory is reported on the _____. later, when the inventory is sold, it becomes _____

balance sheet as a current asset; cost of goods sold on the income statement

assuming sales remain unchanged, if cost of goods sold increases then gross profit _____

decreases

which of the following is merchandise inventory?

goods held for sale in the normal course of business

as inventory quality increases, its cost usually _____

increases

T/F: the inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP

true

which of the following statements are true?

managers can choose the method of accounting of inventory cost that best fits their business using a different inventory accounting method leads to reporting a different amount for cost of goods sold

acme company's balance sheet shows three inventory accounts- raw materials, work in process, and finished goods. acme company must be a _____

manufacturer

if a company used LIFO for tax reporting purposes, then it _____

must have used LIFO for financial reporting purposes most likely has been experiencing rising inventory costs

iris, inc. uses FIFO for financial reporting purposes and LIFO for its income tax return. iris' accounting treatment of its inventory is _____

not in accordance with the LIFO conformity rule

FIFO uses the _____ cost for cost of goods sold on the income statement and the _____ cost for inventory on the balance sheet

oldest; newest

which of the following would be considered merchandise inventory?

purchased finished goods

______ inventory will enter the production process and become _____ inventory. once complete, the goods will become _____ inventory

raw materials; work in process; finished goods

goods isn transit that have terms FOB destination should be included in the _____ inventory

seller's

which of these will require a credit to the inventory account in a perpetual inventory system?

selling inventory for cash selling inventory on account

which inventory method is typically used when accounting for expensive and unique inventory items?

specific identification

which of these inventory accounting methods are acceptable under US GAAP?

specific identification FIFO LIFO weighted average

in a periodic system, for cost of goods sold to be updated, which of the following must occur?

take a physical count of inventory compute cost of goods sold by subtracting ending inventory from goods available for sale

if a company's inventory costs are rising, _____ inventory costing method(s) typically results in a higher income tax expense

the FIFO

who decides which of the many inventory accounting methods a company should use?

the company's management

which statements are true?

the inventory method is an assumed cost flow and does not have to correspond with he actual physical flow of goods a grocery store may use the last-in, first-out inventory method

T/F: account rules allow companies to chose, from a variety of methods, the inventory method that best fits their business environment

true

T/F: specific identification is an inventory method typically used when accounting for expensive and unique inventory items

true

raw materials that have been moved into the production process become _____ inventory

work in process

what inventory accounts would one expect to see in the accounting records of a company that makes furniture?

work in process inventory finished goods inventory raw materials inventory

gross profit is _____

equal to net sales minus cost of goods sold a subtotal on the income statement

the LIFO conformity rule requires that LIFO be used _____

for financial reporting of it is used on the company's income tax return

if cost of acquiring inventory is rising, LIFO will result in which of the following compared to FIFO?

gross profit will be lower income tax expense will be lower cost of goods sold will be higher

when costs to purchase inventory are falling over time, using LIFO leads to reporting _____ than FIFO

higher inventory on the balance sheet

when costs to purchase inventory are rising, using LIFO leads to reporting _____ cost of goods sold and _____ net income than FIFO

higher; lower

which of the following income statement line items are affected by the inventory method chosen?

income tax expense income from operations gross profit income before income tax expense net income

which of the following statements concerning inventory is correct?

inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date

the goals of inventory managers include _____

keeping the costs of buying and storing inventory as low as possible making sure that inventory quality meets customers expectations having enough inventory on hand to meet customer demand

when costs to purchase inventory are rising, using LIFO leads to reporting a _____ than FIFO

lower value for inventory on the balance sheet

assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. list from top to bottom, in order of highest ending inventory to lowest ending inventory value

1. FIFO 2. weighted average 3. LIFO

when costs are rising, _____ produces a larger inventory balance (making the balance sheet appear to be stronger) and smaller cost of goods sold (resulting in a larger gross profit) which makes the company look more profitable

FIFO

which inventory costing method uses the oldest cost for the cost of goods sold on the income statement and the newest cost for inventory on the balance sheet

FIFO

which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO LIFO

using a perpetual inventory system, when a company records a sale of merchandise, it must also record _____

a decrease in its inventory cost of goods sold, which will be reported on the income statement

which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

in times of rising prices, why would a company choose LIFO over FIFO?

LIFO would result in a higher cost of goods sold making the income tax expense lower than FIFO

a company had beginning inventory of 3 units that cost $5 each. during the month, 17 units were purchased for $6 each. the company sold 15 unites during the month and had 5 remaining in ending inventory. if the company uses FIFO instead of LIFO to calculate cost of goods sold, then cost of goods sold will be _____

lower using FIFIO, leading to higher gross profit and higher income taxes

if a new company calculates the average cost of its inventory by adding together the total cost of all purchases and then dividing it by the number of units purchased during the period, it is using the weighted _____ cost method

average

goods in transit that have terms FOB shipping point should be included in the _____ inventory

buyer's

_____ inventory refers to goods a company is holding on behalf of the actual owner of the goods. the company is willing to try to sell the goods for the owner for a fee

consignment

what effect does the inventory costing method have on the income statement? the inventory methods affects the amount of the _____

cost of goods sold, gross profit, income from operations, income before income tax expense, income tax expense and net income