AEM 2225 Chapter 7

Net sales revenue minus cost of goods sold is ______.

Gross Profit

The definition of inventory includes which of the following items? (Check all that apply.)

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

LIFO uses the ______ unit costs for Cost of Goods Sold on the income statement and the ______ unit costs for Inventory on the balance sheet.

Newest; oldest; REASON: FIFO assumes the older items are sold first as Cost of Goods Sold and the newer items remain in Inventory.

Which inventory system requires that the Inventory account be updated when merchandise is purchased?

Perpetual System; REASON: Purchases are recorded as increases in the purchases account.

Sales revenue equals the number of units sold multiplied by the sales _________ and cost of goods sold equals the same number of units sold multiplied by the unit _______.

Price; Costs

Which of the following statements are true about a perpetual inventory system? (Check all that apply.)

After inventory is sold, its cost is removed from the balance sheet and reported on the income statement as an expense. & Until inventory is sold, it is an asset reported at its cost on the balance sheet; REASON: Cost of goods sold is recognized when the inventory is sold, not purchased.

In a perpetual inventory system, Inventory is initially recorded at ______.

Cost

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record ______. (Check all that apply.)

Cost of Goods Sold, which will be reported on the income statement AND a decrease in its inventory

Inventory is a ________ asset because it normally is used or converted into cash within one year or the next operating cycle. (Enter only one word per blank.)

Current OR Short-Term

Unsold inventory is classified as a(n) ____ on the _____ _____.

asset; balance sheet

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its ______ and inventory on its ______.

income statement; balance sheet

Gross profit is on the ______ and equals ______.

income statement; net sales minus cost of goods sold

Using a perpetual inventory system, the effect on the accounting equation of purchasing merchandise on account includes a(n) ______. (Check all that apply.)

increase in assets & increase in liabilities; REASON: The entry includes a debit to Inventory (+A) and credit to Accounts Payable (+L).

In a perpetual inventory system, the journal entry to record the payment of cash for the shipping costs of purchased merchandise will cause ______.

one asset to increase and another asset to decrease; REASON: Inventory (an asset) increases because shipping costs are included as the cost of Inventory and Cash (another asset) decreases.

In a perpetual inventory system, Inventory is reduced by ______.

purchase discounts

Inventory is expensed when ______.

sold

Cost of goods sold on the income statement equals ______.

the number of units sold times their unit cost

Which inventory system records a change in the Inventory account every time goods are bought, sold or returned?

Perpetutal

True or false: Regardless of the inventory costing method used, the financial statements will always report the same amount of inventory on the balance sheet and cost of goods sold on the income statement.

FALSE; REASON: The different methods typically result in different amounts on the balance sheet and income statement because each method assumes different inventory items with different costs are sold. For example, FIFO assumes the older items are sold first and LIFO assumes the newer items are sold first.

In a perpetual inventory system, which of the following statements are true? (Check all that apply.)

The seller should record freight-out as a selling expense AND The purchaser should record freight-in as an asset, Inventory.

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. (Enter one word per blank.)

perpetual; periodic

Which inventory costing method assumes that the inventory's cost flow out in the same order the goods are received?

FIFO; REASON: FIFO assumes the items purchased first are sold first. LIFO assumes the last items purchased are sold first.

Specific _______ is the inventory costing method where the assumed flow of goods is the same as the physical flow of goods and the cost of each inventory item sold equals its actual cost. (Enter one word per blank.)

Identification

The assumption that a company makes about its inventory cost flow has ______. (Check all that apply.)

an effect on the company's income statement AND an effect on the company's balance sheet