ACCT Ch 6

Where is inventory reported in the financial statements?

Balance sheet as a current asset

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

Cost of Goods Sold, Inventory

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

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

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

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

Finished goods, Work in process, Raw materials

The definition of inventory includes which of the following items?

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

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

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

LIFO

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

LIFO reserve

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

Manufacturers

FIFO

Most closely approximates the actual physical flow of inventory

Perpetual inventory system

Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.

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

Perpetual inventory system

LIFO

Provides better matching of current revenues with current inventory cost

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

Reason: Two entries are required: One entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory.

Periodic inventory system

Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

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.

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

Work in process

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

assets decrease by the cost of the inventory, assets increase by the sales price 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.

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

cost of goods sold., 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

The shipping term FOB stands for

free on board.

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.

A multiple-step income statement reports multiple levels of

income

Purchasing inventory on account:

increases assets, increases liabilities

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

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

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

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

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

paid by the supplier.

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

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)

stockholders' equity increases net income increases total assets increase

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 destination means title to the goods passes

when they arrive at the destination.