Accy 2036 (chapter 7 info) Exam 2
What may cause inventory turnover ratios to vary significantly between companies in the same industry?
-some companies may sell more lower-cost goods -some companies may sell fewer higher-cost goods
In a periodic system, the Cost of Goods Sold to be updated, which of the following must occur?
-take a physical count of inventory -compute Cost of Goods Sold sold by subtracting Ending Inventory from Goods Available fro Sale
Rank in order, from highest (top) to lowest (bottom), the anticipated inventory turnover ratios for the following companies ....
1) WalMart 2) Tiffany & Co. (exclusive jewelry store) 3) Bath Iron Works (sells battle ships to the US government)
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
The inventory turnover ration is calculated as:
cost of goods sold divided by average inventory inventory turnover = cost of goods sold / average inventory
What is the cost of goods available for sale allocated to?
cost of goods sold reported on the income statement and ending inventory reported on the balance sheet
Beginning Inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, the 3 goods sold are ____
from the purchases made during the month
consignment inventory
inventory one business is holding and offering fro sale on behalf of a business or individual reported on the balance sheet of the owner, not the company holding the inventory
Goods in transit
inventory that is in the process of being transported from one location to another The owner of the inventory includes the cost of inventory on its balance sheet, until the inventory is delivered and title passes to the customer
When costs to purchase inventory are rising, using LIFO leads to reporting a _______ than FIFO
lower value for inventory on the balance sheet
If the Year 1 ending inventory balance is overstated, then the Year 2 beginning inventory balance will be ___________
overstated
Inventory turnover
process of buying and selling inventory
At year end, CurlZ, Inc.'s inventory consists of 200 bottles of CleanZ at $1 per bottle and 100 boxes of DyeZ at $10 per box. Market values are $1.20 per bottle fro CleanZ and $8 per box for DyeZ. CurlZ should report inventory at __________
$1,000
Mountain Made started the month with 3 quits in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 7 additional quilts fro $210 each. At the end of the month, Mountain Made counted its inventory and found that 2 quilts remained unsold. If Mountain Made uses periodic weighted average cost, its Cost of Goods Sold for the month is ___________
$1,656
On May 1, beginning inventory consists of 10 items that cost $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Using perpetual LIFO, Cost of Goods Sold for the month ended May 31 equals ______
$140
Blog Inc., has net sales of $50,000, cost of goods sold of $30,000, and selling expenses of $5,000. Its gross profit is ______
$20,000 Net Sales - COGS = Gross Profit
On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Using the perpetual LIFO, ending inventory at May 31 is ______
$220
Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold, it sold 1 of the diamonds. Using FIFO, its Cost of Goods Sold for the year ended is ______
$500
Which financial statements are needed to calculate the inventory turnover ratio?
-balance sheet -income statement
Barry Bees, Inc.'s Cost of Goods Sold equals $10,000. Its beginning inventory was $800, and its ending inventory was $1,200. Barry Bee's days to sell equals _______ days (assumes 365 days per year)
36.5
The number of days to sell is calculate as:
365 divided by Inventory turnover ratio
FIFO
Assumes that the costs of the first goods purchased are the costs of the first goods sold
________ 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
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 assumes that inventory costs flow out in the opposite order from which the goods are purchased?
LIFO
True of False: Cost of Goods Sold may include the write-down of inventory to market even though the goods havent been sold.
True Most companies report their write-down expense as Cost of Goods Sold even if the goods havent been sold, because its a necessary cost of carrying the goods that did sell
True or False: Specific identification is an inventory method typically used when accounting for expensive and unique inventory items
True Specific identification requires keeping track of each specific unit and is a cumbersome method fro inexpensive, high-volume inventory items
Weighted Average
Uses the same calculated cost per unit to determine cost of goods sold and ending ending inventory
Which of the following inventories are held and reported by a manufacturer?
Work in process inventory
FIFO, LIFO, and weighted average inventory costing methods are based on:
assumptions that accountants make about the flow of inventory costs
Which of the following would be considered merchandise inventory? a) Cost of Goods Sold b) Raw materials c) Purchased finished goods d) Work in process
c) Purchased finished goods
If a perpetual inventory method is used, what is "forced out" using the cost of goods sold equation?
cost of ending inventory
Inventory is reported as a(n) ______
current asset on the balance sheet
Which of the following is merchandise inventory?
goods held for sale in the normal course of business
inventory
goods that are held for sale in the normal course of business or are used to produce other goods for sale
specific identification
individually identifies and records the cost of each item as cost of goods sold
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
To find a description of the inventory accounting method used by a company, you need to look at the ________
notes to the financial statements
When analyzing a company's inventory turnover ratio, it is more important and more meaningful to compare the ratio with _______
prior years' ratio for the company
What does the inventory costing methods determine?
the amount of the debit to Cost of Goods Sold and credit to Inventory
Who decides which of the many inventory accounting methods a company should use?
the company's management
The process of buying and selling inventory is known as inventory:
turnover
An increased inventory balance is _______
undesirable if it is a result of an accumulation of unsaleable inventory
Ending inventory errors in 2019 _____________
will affect the 2020 goods available fro sale but will not affect the 2020 ending inventory
On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Using the perpetual weighted average cost, ending inventory at May 31 is ______
$228
Alpha Company bought 75 units of inventory for $4 each and 25 units of inventory for $5 each. Alpha's weighted average cost per unit is _____
$4.25
Delta Diamonds had 5 diamonds available for sale this year: 1 purchased June 1 fro $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 fro $600 each. On December 24, it sold 1 of the diamonds. Using FIFO, its Cost of Goods Sold for the year ended is _______
$500
Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds that was purchased on July 9. Using periodic specific identification, its Cost of Goods Sold is ______
$550
Chicken Little stated the month with 5 eggs in its inventory that cost $2 each. During the month, Chicken Little bought 30 more eggs that cost $2.50 each. At the end of the month, Chicken Little counted its inventory and found that 8 eggs remained unsold. If Chicken Little uses FIFO periodic, its Cost of Goods Sold for the month is ________
$65 (since 8 eggs of the 35 eggs available to sell were left, then 27 were sold. 5 eggs x $2 + 22 eggs x2.50)
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 -Net Income
Using a perpetual inventory system, when a company records a sale of merchandise, it must also record ________
-Cost of Goods Sold, which will be reported on the income statement -a decrease in its inventory
Oops, Inc. overstated its ending inventory, during its physical inventory count, by $1,000 in Year 1. Which of the following will also be misstated in year 1?
-Cost of goods sold will be understated by $1,000 -Gross profit will be overstated by $1,000
Gross Profit is _______
-Equal to Net Sales minus Cost of Goods Sold -A subtotal on the income statement
If costs 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.
Which inventory accounting methods are acceptable under US GAAP?
-Specific identification -FIFO -Weighted average -LIFO
What are the acceptable GAAP costing methods?
-Specific identification -weighted average cost -LIFO -FIFO
What are the generally accepted costing methods?
-Specific identification -weighted average cost -LIFO -FIFO
Broyer Company bought inventory FOB shipping point from Cellar Company fro $4,000 cash, including shipping charges. On December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier, Inc., in transit between Broyer and Cellar. Which company should include these goods in its December 31 inventory?
Broyer should include the $4,000 in its inventory
Broyer Company bought inventory from Cellar Company, FOB destination. On December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier, Inc., in transit between Broyer and Cellar. Which company should include these goods in its December 31 inventory?
Cellar
Which company will have the higher number of days to sell?
Company A whose cost of goods sold equals $1,000 and whose average inventory is $100
When the costs are rising, which method would result in the largest amount of income tax expense?
FIFO
Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received?
FIFO
Which method will result in the same Cost of Goods Sold amount whether it is computed using the periodic inventory system or the perpetual inventory system?
FIFO
True or False: Companies that use a perpetual inventory system never need to do a physical count of inventory because in a perpetual system cost of goods sold and inventory are kept up-to-date every time a sale is recorded
False All companies typically adjust their records at year-end to match a physical count regardless of whether they use perpetual or periodic inventory systems
LIFO
assumes that the most recently purchased goods are the first ones sold
FIFO, LIFO and weighted average inventory costing methods are based on _________
assumptions that accountants make about the flow of inventory costs
What do the inventory methods apply to?
both perpetual and periodic inventory systems
If ending inventory in Year 1 is misstated, then Year 1's ________ also must be misstated
cost of goods sold
if a periodic inventory method is used, what is "forced out" using the cost of goods sold equation?
cost of goods sold
market value
focuses on how much the inventory would cost to replace in current market conditions replacement cost
Net realizable value
focuses on the inventory value likely to be realized when sold selling price - selling costs
An increase in a company's inventory balance from a prior year is _____
good if the inventory turnover ratio is higher
As inventory quality increases, its cost usually _________
increases
Goods in transit are _________
inventory items being transported from a seller to a buyer
When costs to purchase inventory are falling over time, using LIFO leads to reporting _______ cost of goods sold and _________ net income than FIFO
lower; higher
Which of the following actions would likely cause the inventory turnover ratio to increase?
maintaining the same average inventory kept on hand and increasing the volume of sales
accounting rules require companies using LIFO to compare inventory cost to ...
market value
Which of the following would be in the raw material inventory of a company making ice cream?
milk and cream used to make the ice cream
accounting rules require companies using FIFO to compare inventory cost to ...
net realizable value
What can be used to calculate cost of goods sold?
net sales - gross profit
If companies are required to adopt IFRS, companies will ________
no longer be able to use LIFO
Which of the following would be considered merchandise inventory?
Purchased finished goods
Acme, Inc. had cost of goods sold of $2,000. If beginning inventory was $2,1000 and ending inventory was $500, Acme's purchases must have been $________
$400
King Costume stated the month with 8 masks in its beginning inventory that cost $10 each. During the month, King Costume purchased 40 additional masks for $12 each. At the end of the month, King counted its inventory and found that 5 masks remained unsold. If King Costume uses LIFO periodic, its Cost of Goods Sold for the month is ______
$510
Which income statement line items are affected by the inventory method chosen?
-Income before Income Tax Expense -Gross Profit -Net Income -Income from Operations -Income Tax Expense
Which of these might cause the value of inventory to fall below its original cost?
-Increased competition -Obsolescence from going out of style -Damage
NOTE:
-The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods -A grocery store may use the Last-in, First-out inventory method
What inventory accounts would one expect to see in the accounting records of a company that makes furniture?
-Work in progress inventory -Raw materials inventory -Finished goods inventory
Which financial statements will be misstated if the Year 1 ending inventory balance is understated?
-Year 1 balance sheet -Year 1 income statement -Year 2 income statement
The journal entry to record a write-down of inventory from cost to its lower market value includes a ______________
-credit to Inventory -debit to Cost of Goods Sold
Probes, Inc. wrote down its inventory to the lower replacement value. The effect on Probes' accounting equation includes a(n) __________
-decrease in assets -decrease in stockholder's equity
To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ________
-detect bookkeeping errors -detect shrinkage -detect theft
reasons inventory value falls below cost
-easily replaced by identical goods at lower cost -becomes outdated or damaged
If Year 1 ending inventory is overstated by $1,000, then the Year 2 _______
-goods available for sale will be overstated by $1,000 -beginning inventory will be overstated by $1,000
Which of the following may occur with a higher inventory turnover ratio?
-reduction in inventory storage costs -reduction in obsolescence
Which of these will require a credit to the inventory account in a perpetual inventory system?
-selling inventory on account -selling inventory for cash
On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Using perpetual FIFO, the Cost of Goods Sold for the month ended May 31 equals ...
124 Cost of Goods Sold (using perpetual FIFO) assumes all of the 10 units in beginning inventory and 2 units from the May 3 purchase were sold. Thus, Cost of Goods Sold equals $124 (=(10 units x $10) + (2 units x $12))
Which inventory costing method uses the oldest cost for cost of goods sold on the income statement and the newest cost for inventory on the balance sheet?
FIFO
Assume a periodic inventory system is used. Which inventory costing method generally results in the cost of the first goods purchased being assigned to ending inventory?
LIFO
If a company assumes that its inventory costs flow out in the opposite order from which the goods were purchased, it uses ______ to value its inventory
LIFO FIFO assumes the inventory costs flow in the same, no opposite order in which the goods were purchased. LIFO assumes inventory costs flow in the opposite order
