ACC 210- Chp 6

The shipping term FOB stands for

free on board

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

inventory

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 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

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.

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

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

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

-inventory -cost of goods sold

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

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

2

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

LIFO reserve

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, purchase returns

are recorded in a separate contra purchases account.

Where is inventory reported in the financial statements?

balance sheet as a current asset

Period-end adjustments are necessary for the:

periodic inventory system

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

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

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

debit inventory

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

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

outdated

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

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

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

-increase an asset and increase revenue -decrease an asset and increase an expense

Purchasing inventory on account:

-increases assets -increases liabilities

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

1

What are the four methods of inventory costing?

FIFO Weighted-average LIFO Specific identification

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

In a perpetual inventory system, freight costs on purchases are

added to inventory costs

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

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 multiple-step income statement reports multiple levels of

income (profit)

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

incurred several years earlier

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

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 perpetual inventory system, when inventory is purchased, the ______________ account is debited, whereas in a periodic system, the ______________ account it debited.

inventory; purchases

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

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

manufacturers

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 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 for by the supplier

The ____________ inventory system records all inventory-related transactions in the Inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale. The ____________ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period.

perpetual; periodic

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

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

-cost of goods sold -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

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

LIFO

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

LIFO reserve