ACCT Ch. 7

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

FIFO

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

False

FIFO stands for ________-in, _________-out. (Enter one word per blank.)

First, First

_________ profits equals net sales minus cost of goods sold.

Gross

In which of the following ways does a periodic system differ from a perpetual system? (Check all that apply.)

Inventory is not updated until the end of the accounting period in a periodic system. Cost of Goods Sold is not updated until the end of the accounting period in a periodic system.

When items from beginning inventory become part of cost of goods sold, then ______.

LIFO liquidation is occurring

Which inventory system requires that the inventory account be updated at the time merchandise is sold?

Perpetual system

A decrease in Inventory will be ______ net income when determining net cash flow provided by ______ activities on the statement of cash flows.

added back to; operating

The assumption that a company makes about its inventory cost flow has ______. (Check all that apply.)

an effect on the company's balance sheet an effect on the company's income statement

Specific identification is ______.

an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item

In a perpetual inventory system, Inventory is initially recorded at ______.

cost

Inventory is classified as a ______.

current asset

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

decreases

An increase in a company's inventory balance from a prior year is ______ if the inventory turnover ratio is ______.

desirable; higher

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

goods sold

Generally accepted accounting principles (GAAP) require that any company using LIFO ______.

must report the FIFO value of the same inventory in the notes to the financial statements

FIFO uses the ______ cost for Cost of Goods Sold on the income statement and the ______ cost for Inventory on the balance sheet.

oldest; newest

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

In a perpetual inventory system, Inventory is reduced by ______.

purchase discounts

Inventory is expensed when ______.

sold

An increase in Inventory will be ______ net income when determining net cash flow provided by operating activities.

subtracted from

Sales revenue on the income statement equals ______.

the number of units sold times the sales price

Ending inventory errors in 2018 ______.

will affect the 2019 goods available for sale but will not affect the 2019 ending inventory

On May 1, beginning inventory consists of 10 items that cost $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, Cost of Goods Sold for the month ended May 31 equals ______.

$140

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

Boopsie Agin, the company's bookkeeper, recorded the purchase of merchandise on account with a debit to Cost of Goods Sold and a credit to Cash. As a result, ______. (Check all that apply.)

stockholders' equity is understated assets are understated liabilities are understated

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

True or false: Regardless of the inventory costing method used, the financial statements will always report the same amount of inventory on the balance sheet and cost of goods sold on the income statement.

False

Applying the lower of cost or net realizable value rule results in inventory being reported at the ______.

market value if lower than cost

The specific identification method ______. (Check all that apply.)

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

A company had beginning inventory of 5 units that cost $10 each. During the month, 15 units were purchased for $11 each. The company sold 12 units during the month and had 8 remaining in ending inventory. If the company uses FIFO to calculate cost of goods sold, then its gross profit will be $5 ___________than if it had used LIFO. (Enter one word per blank.)

more

True or false: GAAP require companies to include in the notes FIFO values if LIFO is used and is significantly different.

True

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 FIFO, its Inventory at December 31 is ______.

$2,300

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

Widget Company started the month with 10 gadgets in its Inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. At the end of the month, Widget counted its inventory and found that 8 gadgets remained unsold. If Widget uses FIFO, its Cost of Goods Sold for the month is ______.

$302

Which of the following statements are true? (Check all that apply.)

An increased inventory balance is desirable if management is building up stock in anticipation of higher sales. An increased inventory balance is undesirable if it is a result of an accumulation of unsaleable inventory.

Unsold inventory is classified as a(n) ________ on the ________. (Enter one word per blank)

Asset, Balance Sheet

The _____________inventory system records all inventory-related transactions in the inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale. The ___________ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period. (Enter one word per blank.)

Perpetual, Periodic

Sales revenue equals the number of units sold multiplied by the sales ___________ and cost of goods sold equals the same number of units sold multiplied by the unit _____________.

Price, Cost

Who decides which of the many inventory accounting methods a company should use?

The company's management

Which inventory system requires purchases of merchandise to be recorded in the inventory account instead of the purchases account?

The perpetual inventory system

In a perpetual inventory system, which of the following statements are true? (Check all that apply.)

The seller should record freight-out as a selling expense. The purchaser should record freight-in as an asset, Inventory.

True or false: Accounting rules allow companies to choose, from a variety of methods, the inventory method that best fits their business environment.

True

When costs are rising and a purchase occurs after the last sale, cost of goods sold will be ______ using LIFO periodic than using LIFO perpetual.

higher

Specific __________is the inventory costing method where the assumed flow of goods is the same as the physical flow of goods and the cost of each inventory item sold equals its actual cost. (Enter one word per blank.)

identification

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

Gross profit is on the ______ and equals ______.

income statement; net sales minus cost of goods sold

LIFO liquidation occurs when ______.

items from beginning inventory become part of cost of goods sold

Where is inventory located on the financial statements?

Balance sheet as a current asset

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record ______. (Check all that apply.)

Cost of Goods Sold, which will be reported on the income statement a decrease in its inventory

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

Which of these might cause the value of inventory to fall below its original cost? (Check all that apply.)

Damage Increased competition Obsolescence from going out of style

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 of the following statements are true? (Check all that apply.)

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.