chapter 6 sqmartbook
Which of the following costs are recognized in work in process for a manufacturing company?
overhead raw materials direct labor
FOB destination means title to the goods passes
when they arrive at the destination.
Under a perpetual inventory system, the entry to record the return of goods previously purchased on account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is:
CORRECT
The primary benefit for choosing this method is that it tends to save taxes.
LIFO
inventory that consists of items for which the manufacturing process is complete?
finished goods
The FIFO inventory method assumes that units remaining in ending inventory are the _______ units purchased
lastest
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
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
Which of the following accounts would be found in the balance sheet of a manufacturing company?
work in process
Freight-in is
included as a cost of inventory
Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are
included in Gerald's inventory.
A multiple-step income statement reports multiple levels of
income
In a perpetual inventory system, when a company sells inventory on account, how many entries are required?
2
Clark uses the perpetual inventory system. Clark sells goods to a customer on account for $1,000. The cost of the goods sold was $700. Which of the following entries are required?
Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 Debit Cost of Goods Sold $700; credit Inventory $700
Which disclosure allows financial statement users to compare companies that use LIFO to companies that use FIFO?
LIFO reserve
Inventory not yet sold is classified as an _____ in the ______ _______
asset in the balance sheet
The shipping term FOB stands for
free on board
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
Cost of goods sold divided by average inventory is
inventory turnover
The _________ __________ ratio shows the number of times the firm sells its average inventory balance during a reporting period.
inventory turnover
Freight-in is recorded as part of ______, whereas freight out is often recorded as ______.
inventory; selling expense
Companies that produce the inventory they sell are referred to as
manufacturers
What type of company purchases raw materials and makes goods to sell?
manufacturers
Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.
merchandising
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
Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for
inventory & cost of goods sold
Which of the following items are readily available from an inventory account under the perpetual inventory system?
-beginning inventory balance -cost of units sold -individual purchases -ending inventory balance
FIFO
Most closely approximates the actual physical flow of inventory
Periodic inventory system
Sherman Company recognizes cost of goods sold after completing a physical inventory.
The LIFO difference (sometimes called LIFO reserve) helps investors
compare the performance of companies that use different cost flow assumptions.
When inventory is sold, the cost of inventory is recognized as an
expense
Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals ______ times.
10
Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.
inventory & costs of goods sold
Revenues and expenses arising from activities that are not part of the company's operations are classified as ______ revenues and expenses.
nonoperating
The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.
specific identification
The lower of cost and net realizable value method causes losses in the value of inventory to be recognized in the period when
the value declines below cost.
Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production.
raw materials inventory
The LIFO inventory method assumes that the units that remain in ending inventory are
the oldest units in inventory
Berta Company's inventory value has declined during the current period. Berta does not expect to sell its inventory during the current year. Berta should recognize the loss in the period when the inventory
value declines
Josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?
Debit Cost of Goods Sold $1,500; credit Inventory $1,500
When prices rise, which inventory method tends to result in lower income and a lower tax liability?
LIFO
Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?
LIFO
Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?
LIFO only
The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the
LIFO reserve
The weighted average cost method assumes that cost of goods sold consists of
a mixture of all the goods available for sale.
If a company pays freight-in for its inventory, that amount will later be included in
cost of goods sold.
Some companies refer to "cost of goods sold" as
cost of sales cost of merchandise sold cost of products sold
A periodic inventory system measures cost of goods sold by
counting inventory at the end of the period.
inventory is classified as
current asset
Where is inventory classified in the financial statements?
current asset in the balance sheet
Average days in inventory measures
the average time the inventory is held.
The LIFO inventory method assumes that the units sold are
the most recent units purchased
The inventory turnover ratio directly measures ______.
the times per period the average inventory balance is sold
The LIFO adjustment is used internally to convert the inventory
to the LIFO basis.
What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?
total assets increase net income increases stockholders' equity increases
Which of the following methods are not used for inventory costing?
NIFO Simple-average
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
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?
LIFO
Average days in inventory is calculated as
365 divided by the inventory turnover ratio.
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
Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?
FIFO
The ______ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.
FIFO
Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?
FIFO
Which of the following methods are available for costing inventory?
FIFO LIFO Weighted-average Specific identification
The cost of goods not yet sold is recorded in the ______ account, whereas the cost of goods that are sold to customers is recorded in _____.
Inventory; Cost of Goods Sold
Vogel Company maintains its inventory records using the FIFO assumption, but reports its inventory consistent with LIFO. At the end of the year, Vogel converts its inventory balance from FIFO to LIFO by using the
LIFO adjustment
The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the
LIFO reserve
Perpetual inventory system
Peter Company recognizes cost of goods sold each time it recognizes a sale.
LIFO
Provides better matching of current revenues with current inventory cost
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.
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
Meller purchases inventory on account. As a results, Meller's
assets will increase
The ratio that indicates the approximate number of days the average inventory is held is referred to as the:
average days in inventory
The formula 365 divided by the inventory turnover ratio equals the
average days in inventory.
The lower of cost and net realizable value method was developed to
avoid reporting inventory at an amount that exceeds the benefits it provides.
Where is inventory reported in the financial statements?
balance sheet as a current asset
"Cost of sales" is another name for which of the following accounts?
cost of goods sold
Catalina Bookstore pays freight on books shipped to its store. The shipping cost is debited to Inventory. When the books are sold, the freight costs pertaining to the books are included in:
cost of goods sold
The formula for inventory turnover is
cost of goods sold divided by average inventory.
The Work-in-Process inventory account typically includes which costs?
direct labor raw materials indirect manufacturing costs
The gross profit ratio is calculated as
gross profit divided by net sales.
Gross profit divided by net sales equals
gross profit ratio.
The purchase discount term, 2/10, n/30, means that the purchaser ______.
has 10 days from the purchase date in which to pay and receive a 2% discount
Purchasing inventory on account:
increases liabilities increases assets
In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs
incurred several years earlier.
Items held for sale in the normal course of business are referred to as
inventory
The estimated selling price of inventory less any costs of completion, disposal, and transportation is referred to as:
net realizable value
Gross Profit is
net sales - cost of goods sold
True or false: When goods are sold, the cost of the goods is transferred from the Inventory account to the Cost of Goods Sold account.
true
Work in process inventory refers to inventory where the manufacturing process is_______ whereas finished goods refers to inventory where the manufacturing process is ________
unfinished, complete
Which of the following accounts are typically reported in the balance sheet of a manufacturing company?
work in process raw materials finished goods
The specific identification method
would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost
Beginning inventory is $20,000. Purchases of inventory during the year are $100,000. Ending inventory is $50,000. What is cost of goods sold?
$70,000 Reason: $20,000 + $100,000 - $50,000 = $70,000.
josh Corporation uses the perpetual inventory system. Josh sells goods to a customer on account for $2,000. The cost of goods sold is $1,500. What is the entry required to record the expense of the inventory sold?
Debit Cost of Goods Sold $1,500; credit Inventory $1,500
The definition of inventory includes which of the following items?
Items currently in production for future sale, Items held for resale, Materials used currently in the production of goods to be sold
The primary benefit of LIFO is:
tax savings
Freight-out is
recognized as operating expense
Cellem, Inc.'s beginning inventory is $4,000 and its ending inventory is $2,000. The inventory turnover is 6. Cost of goods sold must equal:
$18,000 Reason: The inventory turnover of 6 equals cost of goods sold divided by average inventory of $3,000 (=($4,000+$2,000)/2). Cost of goods sold equals 6 times $3,000 = $18,000.
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 reason: gross profit=sales-cost of goods sold 50,000-30,000 =
Prather Inc. has sales of $100,000, sales returns of $5,000, cost of goods sold of $60,000, and selling expenses of $3,000. Calculate gross profit.
$35,000 Reason: Net sales is $95,000 ($100,000 - 5,000). Net sales of $95,000 less cost of goods sold of $60,000 = $35,000.
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 Reason: The discount is 1% if paid within 7 days or the full amount is due within 30 days.
Beginning inventory is $60,000. Purchases of inventory during the year are $100,000. Cost of goods sold is $120,000. What is ending inventory?
40,000 Reason: $60,000 + $100,000 - $120,000 = $40,000.
Bernie Corp. uses the FIFO inventory method to calculate cost of goods sold for financial reporting purposes. Which of the following methods can Bernie use for tax purposes?
FIFO and weighted-average only
Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?
debit inventory
If a company uses a perpetual inventory system, the entry to record the company's return of goods previously purchased on account includes ______ and _____.
debit to Accounts Payable credit to Inventory.
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:
decrease an asset and increase an expense increase an asset and increase revenue
How is cost of goods sold classified in the financial statements?
expense in the income statement
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
what companies purchase inventory that is primarily in finished form and ready for resale to customers.
merchandising
Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming
outdated
Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are
paid by the supplier
Under the ________ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.
perpetual
The estimated selling price of inventory less costs necessary to sell the inventory is referred to as net
realizable value