mgmt chapter 6

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.

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

Two

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

Weighted-average LIFO Specific identification FIFO

Inventory is classified as

a current asset.

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

included in Gerald's inventory.

Freight-in costs are debited to Inventory in this inventory system:

perpetual only

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 ______ 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

Purchase returns are recorded in a separate contra purchase __________ account in a inventory system.

periodic

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

Inventory

In a periodic inventory system, purchase returns

are recorded in a separate contra purchases account

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

The shipping term FOB stands for

free on board.

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

Purchasing inventory on account:

increases liabilities increases assets

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

Items held for sale in the normal course of business are referred to as

inventory

In a perpetual inventory system, when inventory is purchased, the ___________ account is debited, whereas in a periodic system, the ____________ account is debited.

inventory; purchases

True or false: Under the perpetual inventory system, an adjusting entry is needed to close temporary inventory-related accounts, record cost of goods sold, and adjust the inventory account balance.

False

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

outdated

A _________ inventory system updates the inventory account each time a sale or purchase is made, whereas a __________ inventory system calculates cost of goods sold and ending inventory at the end of the reporting period.

perpetual; periodic

A multiple-step income statement reports multiple levels of

profitability

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

Simple-average NIFO

Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be

a separate freight-in account.

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a _________ inventory system

perpetual

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 stockholders' equity increases net income increases

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

Debit Inventory

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

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

FIFO

The definition of inventory includes which of the following items?

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

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

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

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the

LIFO reserve

What type of company purchases raw materials and makes goods to sell?

Manufacturers

FIFO

Most closely approximates the actual physical flow of inventory

Perpetual inventory system

Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

Which of the following inventory systems requires a physical count in order to determine cost of goods sold?

Periodic inventory system

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

Periodic inventory system

Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

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.

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.

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

Companies that produce the inventory they sell are referred to as

manufacturers

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

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

two

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

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

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

paid by the supplier.

Period-end adjustments are necessary for the:

periodic inventory system

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

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will ______than cost of goods sold determined using the FIFO inventory assumption.

higher

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

incurred several years earlier.

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

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

Kilian Company's inventory balance at the end of the 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 until the following year, the financial statement effect in the current year will be:

understated assets, retained earnings, and net income

FOB destination means title to the goods passes

when they arrive at the destination.