Ch.7

If Year 1 ending inventory is overstated by $1,000, then the Year 2 ______. (Check all that apply.)

beginning inventory will be overstated by $1,000 goods available for sale will be overstated by $1,000

Under a perpetual inventory system, the journal entry to record the return of goods you had previously purchased on account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is:

correct

Using a perpetual inventory system, the purchaser's journal entry to record the return of goods previously purchased on account includes a ______. (Check all that apply.)

debit to Accounts Payable credit to Inventory

Using the gross method, the journal entry to record taking a discount when paying for goods previously purchased on account includes a(n) ______.

decrease in assets and liabilities

What are the two stages of accounting for a purchase discount using the gross method? (Check all that apply.)

e Inventory account is later reduced if payment is made within the discount period. The purchase is first recorded at full cost.

When costs are rising and a purchase occurs after the last sale, cost of goods sold will be ______ using LIFO periodic than using LIFO perpetual.

higher

LIFO liquidation occurs when ______.

items from beginning inventory become part of cost of goods sold

LIFO Perpetual is rarely used in practice because it is ______.

more cumbersome and difficult to know the latest costs at the time of the sale

Inventory shrinkage as a result of theft, damage or obsolescence that is discovered during a physical inventory count at the end of the accounting period is recorded with a decrease to Inventory ______.

only in a perpetual system

If the Year 1 ending inventory balance is overstated, then the Year 2 beginning inventory balance will be ______.

overstated

An increase in Inventory will be ______ net income when determining net cash flow provided by operating activities.

subtracted from

The journal entry to record the payment within the discount period for goods previously purchased on account causes _____. (Check all that apply.)

total assets to decrease and total liabilities to decrease

Gotit Inc. paid an invoice for $1,000 of merchandise plus shipping of $100. If the terms were 2/10, n/30, and the bill was paid within one week of receipt, how much cash was paid?

$1,080

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 LIFO, ending inventory at May 31 equals ______.

$220

If ending inventory in Year 1 is misstated, then Year 1's ______ also must be misstated.

cost of goods sold

LIFO liquidation causes ______.

higher taxes

Ending inventory errors in 2018 ______.

will affect the 2019 goods available for sale but will not affect the 2019 ending inventory

Bottom, Inc. paid an invoice for $1,000, with discount terms of 1/7, n/30, within the discount period. The net amount paid was ______.

$990

In times of falling prices, which method—FIFO or LIFO—would result in a higher inventory turnover for a company?

FIFO

LIFO reserves represent the excess of ______.

FIFO over LIFO and is reported in the inventory footnote of companies using LIFO

In times of rising prices, which will result in the higher cost of goods sold, FIFO perpetual or FIFO periodic?

It will be the same under both.

In times of rising prices, which method—FIFO or LIFO—would result in a higher inventory turnover for a company?

LIFO

When items from beginning inventory become part of cost of goods sold, then ______.

LIFO liquidation is occurring

In a perpetual inventory system, the return of merchandise XYZ recently purchased on account will have the following effects on XYZ's accounting equation. (Check all that apply.)

Liabilities will decrease. Assets will decrease.

True or false: Cost of goods sold is the same under both FIFO periodic and FIFO perpetual.

True

True or false: GAAP require companies to include in the notes FIFO values if LIFO is used and is significantly different.

True

Which financial statements will be misstated if the Year 1 ending inventory balance is understated? (Check all that apply.)

Year 1 balance sheet Year 2 income statement Year 1 income statement

A decrease in Inventory will be ______ net income when determining net cash flow provided by ______ activities on the statement of cash flows.

added back to; operating

True or false: An error in ending inventory in Year 1 will cause ending inventory in Year 2 to be misstated as well.

False

In times of rising prices, which of the following will be greater as a result of a LIFO liquidation? (Select all that apply.)

Income tax expense Gross profit

Which of the following would be found in a company that has an effective system of internal controls regarding inventory? (Check all that apply.)

Limit the access to inventory to authorized personnel only. One employee is responsible for actual physical control over inventory while a different employee enters inventory information into the computer. Inventory is stored in a protected area.

Which of the following 2019 financial statement line items will be affected if the 2019 ending inventory is overstated? (Check all that apply.)

Net income will be overstated. Current assets will be overstated. Cost of goods sold will be understated.

When calculating net cash flow provided by operating activities, an increase in Accounts Payable is ______ net income because payments to suppliers are ______ than new purchases.

added to; less

When calculating net cash flow provided by operating activities, a decrease in Accounts Payable is ______ net income because payments to suppliers are ______ than new purchases.

deducted from; more

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ______. (Check all that apply.)

detect shrinkage detect bookkeeping errors detect theft

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? (Check all that apply.)

Cost of goods sold will be understated by $1,000. Gross profit will be overstated by $1,000.

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

True or false: LIFO Perpetual is the most widely used of the inventory accounting methods.

False

The journal entry to record taking a discount when paying for goods previously purchased on account using the gross method includes a ______. (Check all that apply.)

debit to Accounts Payable for the original cost credit to Inventory for the discount amount credit to Cash for the amount paid

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