Chapter 7 reading questions+answers

Cost of Goods Sold is debited and Inventory credited, when the sale occurs using the ___________ inventory system

perpetual

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 the inventory's cost flow out in the same order the goods are recieved?

FIFO

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

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

Beta Company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Beta's weighted average cost is ___________ .

$12.10 (80*12 + 20*12.50 = 1210 --> 1210/(80+20) = 12.10

Blog Inc., has net sales of $50000, cost of goods sold of $30000, and selling expenses of $5000. Its gross profit is _____________ .

$20000 (or) $20,000

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 started 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

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

Barry, Inc.'s sales equal $30000 and cost of goods sold equals $10000. Its beginning inventory was $800 and its ending inventory is $1200. Barry's inventory turnover ratio equals _______ times.

10 because 10000/((800+1200)/2) = 10

If Barry Bees, Inc.'s days to sell equals 73 days based on a 365-day year, then its inventory turnover ratio equals _________ times.

5 because 365/73 = 5

Which of the following is merchandise inventory?

Goods held for sale in the normal course of business

Which inventory method is typically used when accounting for expensive and unique inventory items?

Specific identification

Which statement is true?

Specific identification, weighted average cost, LIFO and FIFO are acceptable GAAP costing methods.

What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

Weighted average cost

Which of the following exemplifies how an overstatement of Year 1's Ending inventory affects Year 2?

Year 2 Beginning Inventory is overstated +Purchases is accurate -Ending Inventory is accurate =Cost of Goods Sold is overstated

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

cost of goods sold

Acme Company's balance sheet shows three inventory accounts—raw materials, work in process, and finished goods. Acme Company must be a __________ .

manufacturer

If a company's inventory costs are rising, ___________ inventory costing method(s) typically results in a higher income tax expense.

the FIFO

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 because (10*10 + 12*10) - (10*12 + 10*2) + (10*14) = 220

Bijoux Company has Net Sales of $40000; Beginning Inventory of $5000; Purchases of $25000 and Ending Inventory of $7000. Cost of Goods Sold equals ___________ .

$23000 (or) $23,000

Which of these would explain an increase in a company's inventory turnover ratio?

- A decrease in total inventory - An increase in the demand for the company's products

Which of the following statements are true?

- Managers can choose the method of accounting for inventory cost (i.e., FIFO, LIFO, etc.) that best fits their business - Using a different inventory accounting method leads to reporting a different amount for cost of goods sold

Which of these will require a credit to the inventory account in a perpetual inventory system?

- Selling inventory on account - Selling inventory for cash

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 and Net Income

As inventory quality increases, its cost usually ____________ .

increases

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

Goods in transit that have terms FOB destination should be included in the __________ inventory.

seller's

Ending inventory errors in 2019 ____________ .

will affect the 2020 goods available for sale but will not affect the 2020 ending inventory

Lux company started the month with 20 lamps in its beginning inventory that cost $30 each. During the month, Lux purchased 80 additional lamps for $31 each. At the end of the month, Lux counted its inventory and found that 25 lamps remained unsold. If Lux uses periodic weighted average cost, its Cost of Goods Sold for the month is ____________ .

$2310 (or) $2,310

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. During the month, Mountain Made purchased 20 additional quilts for $210 each. At the end of the month, Mountain Made counted its inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, its Cost of Goods Sold for the month is ___________ .

$3780 (or) $3,780

Which of the following 2020 financial statement line items will be affected if the 2020 ending inventory is overstated?

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

In a periodic system, for 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 for Sale.

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

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record ___________ .

- a decrease in its inventory - cost of goods sold, which will be reported on the income statement

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ___________ .

- detect bookkeeping errors - detect shrinkage - detect theft

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts ______________.

- detect theft - detect shrinkage - detect bookkeeping errors

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.)

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

False (The Year 2 ending inventory is based on a physical count and is thus not affected by the error made in Year 1. The error made in Year 1 is corrected (or offset) by misstating the Year 2 cost of goods sold.)

Mountain People's Co-op offers herbal tea for sale on consignment from Green Heron Company. Which company should report the inventory of unsold tea on its balance sheet?

Green Heron Company

Which of the following statements concerning inventory is correct?

Inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date.

Which inventory costing method assumes that inventory costs flow out in the opposite order from which the goods were purchased?

LIFO

True or false: The inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP.

True (The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods. For example, a grocery store may use Last-in, First-out inventory method.)

Which step must happen first when determining Cost of Goods Sold using a periodic inventory system?

count the number of units on hand

Days to sell measures the average number of ____________ .

days from the time inventory is purchased to the time it is sold

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 because (10*10 + 12*10)/20 = 11 11*12 = 132 220-132 = 88 88+ (10*14) = 228

How does the inventory costing methods affect the income statement when costs tend to rise over time?

Cost of Goods Sold on the income statement differs between the methods causing income Tax Expense to differ.

An increase in a company's inventory balance from a prior year is ___________.

good if the inventory turnover ratio is higher

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

The inventory turnover measures the ___________.

number of times the average inventory balance is bought and sold

When analyzing a company's inventory turnover ratio, it is more important and more meaningful to compare the ratio with ___________ .

prior years' ratios for the company

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. Will Cost of Goods Sold be higher using FIFO periodic inventory system or FIFO perpetual inventory system?

Cost of Goods Sold will be the same

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