AC Chapter 7

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

Merchandise inventory ______.

is reported as a current asset on the balance sheet consists of products acquired in a finished condition that are available for sale

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

Inventory is reported on the ______. Later, when the inventory is sold, it becomes ______.

balance sheet as a current asset; Cost of Goods Sold on the income statement

Applying the lower of cost or market rule results in inventory being reported at the ______.

market value if lower than cost

Assuming rising inventory prices, rank which inventory method results in the higher ending inventory value. List from top to bottom, in order of highest ending inventory to lowest ending inventory value.

1. FIFO 2. WA 3. LIFO

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 Reason: Inventory turnover ratio=cost of goods sold/average inventory or $10,000/ (($800 + $1,200)/2).

True or false: GAAP requires that a business must use an inventory accounting method that is the same as the physical flow of goods in and out of the business.

False

Which of the following may occur with a higher inventory turnover ratio?

Reduction in obsolescence Reduction in inventory storage costs

Which statement is true?

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

Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross Profit

decreases

FIFO, an inventory costing method, actually describes how to calculate the cost of ______.

goods sold

When costs to purchase inventory are rising, using LIFO leads to reporting a ______ than FIFO.

lower value for Inventory on the balance sheet

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be ______.

73 days

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 for CleanZ and $8 per box for DyeZ. CurlZ should report its inventory at ______.

$1,000 Reason: The lower-of-cost-or-market rule requires the DyeZ boxes be recorded at the lower market value of $8 instead of the higher cost of $10. Thus, Inventory equals $1,000 (=(200 bottles x $1) + (100 boxes x $8)).

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 1 of the diamonds. Using periodic weighted average cost, its inventory after the December 24 sale is ______.

$2,240

Which statement are true?

-The inventory costing methods determine the amount of the debit to Cost of Goods Sold and credit to Inventory. -Specific identification, weighted average cost, LIFO and FIFO are generally accepted costing methods. -The inventory methods apply to both perpetual and periodic inventory systems.

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. Company B whose cost of goods sold equals $2,000 and whose average inventory is $100. Multiple choice question.

Company A Reason: Days to sell (=365/inventory turnover ratio) would be higher for Company A at 36.5 days (=365 days/($1,000/$100)) versus Company B at 18.25 days (=365 days/($2,000/$100)).

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.

Of the 4 companies listed below, which company is more likely to use specific identification to value its inventory and cost of goods sold?

Custom home builder

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

Risen, Inc. has beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO or LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFO

Which of the following income statement line items are affected by the inventory method chosen? (Select all that apply.)

Gross Profit Income before Income Tax Expense Net Income Income Tax Expense Income from Operations

How is the lower-of-cost-or-market rule applied when there are more than 2 types of inventory?

Only the items that have market values lower than the costs will be written down.