Accounting Chapter 6

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

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory.

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.) (2)

inventory. cost of goods sold.

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

Companies that produce the inventory they sell are referred to as ______

manufactures

What type of company purchases raw materials and makes goods to sell?

manufactures

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are

paid by the supplier.

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 material inventory

The Work-in-Process inventory account typically includes which costs?

raw materials indirect manufacturing costs direct labor

Freight out

recognized as operating expense

Which inventory cost flow method approximates the physical flow of inventory items?

FIFO

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

FIFO

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.

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO

The ____ cost flow assumption more realistically matches the current cost of inventory with current sales revenue.

LIFO

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

Which of the following accounts would be found in the balance sheet of a manufacturing company?

work in process

_____ inventory refers to the products that have been started in production, but are still incomplete.

work in process

A multiple-step income statement reports multiple levels of ______

income

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

increase an asset and increase revenue decrease an asset and increase an expense

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)

net income increases total assets increase stockholders' equity increases

Freight-in is recorded as part of ______, whereas freight out is often recorded as ______.

inventory; selling expense

Where is inventory reported in the financial statements?

Balance sheet as a current asset

When prices increase, the _____ inventory method provides the best matching of revenue and expenses.

LIFO

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the

LIFO reserve

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the _____ _____

LIFO reserve

FIFO

Most closely approximates the actual physical flow of inventory

Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs?

Perpetual inventory system

Which of the following accounts are typically reported in the balance sheet of a manufacturing company?

Work in process Finished goods Raw materials

Which inventory account consists of the cost of items for which the manufacturing process is complete?

finished goods inventory

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

incurred several years earlier.

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

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

tems held for sale in the normal course of business are referred to as ________

inventory

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

two

Kilian Company's inventory balance at the end of the year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered until the following year, the financial statement effect in the current year will be:

understated assets, retained earnings, and net income

FOB shipping point means title to the goods passes

when they are shipped.

Inventory is classified as

a current asset

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory) (3)

stockholders' equity increases net income increases total assets increase

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as _____ ______ revenues and expenses.

non operating

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming ___

old

Kilian Company's inventory balance at the end of the current year does not include $10,000 of inventory that was stored in a separate warehouse and accidentally excluded from the physical count. If the error is not discovered, the effect of this error on financial statements in the following year will be:

overstated net income

Under the _____ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.

perpetual

Which of the following methods are used for inventory costing? (4)

Last in, first out (LIFO) Specific identification First in, first out (FIFO) Weighted average cost

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

The shipping term FOB stands for

Free on board

Freight in

added to the cost of inventory

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Inventory Cost of Goods Sold

The definition of inventory includes which of the following items? (3)

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

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

LIFO

Provides better matching of current revenues with current inventory cost

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 lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides.

_____ _____ inventory consists of items for which the manufacturing process is complete.

finished goods

The formula for inventory turnover is

cost of goods sold divided by average inventory.

The Work-in-Process inventory account typically includes which costs? (3)

direct labor indirect manufacturing costs raw materials

Which of the following items are readily available from an inventory account under the perpetual inventory system?

ending inventory balance cost of units sold beginning inventory balance individual purchases

Purchasing inventory on account:

increases liabilities increases assets

The specific identification method (2)

would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the ____ _____

LIFO reserve

Gross Profit is

Net Sales Revenue minus Cost of Goods Sold.

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 Cost of Goods Sold $700; credit Inventory $700 Debit Accounts Receivable $1,000; credit Sales Revenue $1,000

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 of the following accounts are typically reported in the balance sheet of a manufacturing company? (3)

Raw materials Work in process Finished goods

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

debit inventory

______ _______ inventory includes the cost of components that will become part of the finished product but have not yet been used in production.

raw materials

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