ACC Module 6

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 Blank______ income statement.

multiple-step

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

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

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

paid by the supplier.

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

Blank 1: outdated, spoiled, obsolete, old, expired, or aged

Match each scenario with the type of inventory system.

Perpetual inventory system: Neumann Company can determine the cost of inventory still on hand by referring to the inventory account. Periodic inventory system: Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

Match each scenario with the type of inventory system.

Perpetual inventory system: Peter Company recognizes cost of goods sold each time it recognizes a sale. Periodic inventory system: Sherman Company recognizes cost of goods sold after completing a physical inventory.

The Blank______ method of valuing inventory was developed to avoid reporting inventory at an amount that is Blank______ 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

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

FOB destination means title to the goods passes

when they arrive at the destination.

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

Debit Inventory

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

FIFO

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

FIFO

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

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

LIFO reserve

Which of the following methods are not used for inventory costing?

NIFO Simple-average

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

Meller purchases inventory on account. As a results, Meller's

assets will increase.

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.

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

The definition of inventory includes which of the following items?

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

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

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

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

Manufacturers

Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error

immediately.

A multiple-step income statement reports multiple levels of

income, earnings, profit, or profitability

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

Inventory, Purchases

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO

reserve

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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.

Blank 1: perpetual Blank 2: periodic

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

Inventory Cost of Goods Sold

When prices increase, the _________ inventory method provides the best matching of revenue and expenses.

LIFO

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

Periodic inventory system

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

Perpetual

Which of the following methods are available for costing inventory?

Specific identification FIFO Weighted-average LIFO

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 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.

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.

Alexandra Inc. utilizes a periodic inventory system. Related to inventory, Alexandra Inc. must record period-end adjustments to:

adjust the inventory balance to its proper ending balance record cost of goods sold for the period close purchase-related temporary accounts

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

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

The purposes of the period-end adjustment in the periodic inventory system include:

close the temporary accounts relating to inventory purchases, discounts, and returns and allowances recognize cost of goods sold relating to sales during the period reflect the proper ending balance in the inventory account

Under the periodic inventory system, purchase returns and purchase discounts accounts represent

contra purchases accounts.

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

cost of goods sold. inventory.

A periodic inventory system measures cost of goods sold by:

counting inventory at the end of the period.

Inventory is classified as a

current asset

The shipping term FOB stands for

free on board

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, greater, more, or larger

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

Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because:

inventory costs generally change over time.

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)

net income increases stockholders' equity increases total assets increase

Match the inventory cost flow assumptions on the left with the scenario on the right.

FIFO: Most closely approximates the actual physical flow of inventory LIFO: Provides better matching of current revenues with current inventory cost

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, smaller, or less