ACTY CH 6
inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.
FIFO
LIFO is considered an income-statement approach for reporting inventory because it: Always results in a lower amount of net income being reported. Always results in a higher amount of net income being reported. Better approximates inventory cost necessary to generate revenue. Better approximates the value of ending inventory.
better approximates inventory cost necessary to generate revenue
Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods. Multiple select question. Sales Revenue Inventory Cost of Goods Sold Purchases
cogs inventory
The formula for inventory turnover is Multiple choice question. sales divided by gross profit. cost of goods sold divided by average inventory. gross profit divided by average inventory. inventory divided by cost of goods sold.
cogs/average inv
Service Company
companies that generate revenues by providing services to their customers rather than selling inventory
Using a perpetual inventory system, the sale of inventory on account is recorded with a: Debit to Cost of Goods Sold. Credit to Inventory. Credit to Sales Revenue. All of the other answers are recorded with the sale of inventory on account.
credit sales revenue
The FIFO method assumes that:
first units purchased are the first ones sold
The shipping term FOB stands for Multiple choice question. free on board. freight over board. free onto buyer. freight on board.
free on board
Operating income is defined as: Multiple Choice All revenues minus all expenses. Gross Profit minus Operating Expenses. Income before Income Tax Expense. Sales Revenue minus Cost of Goods Sold.
gross profit minus operating expenses
Companies that purchase inventories that are primarily in finished form for resale to customers are known as:
merchandising companies
A _____________ inventory system is one that is continually updated to reflect inventory purchases and sales.
perpetual
Given the information below, what is the gross profit? Sales revenue$300,000 Accounts receivable 53,000 Ending inventory118,000 Cost of goods sold240,000 Multiple Choice$60,000$113,000$182,000$129,000
60,000
For the current year, Theta Corporation has beginning and ending inventories of $40,000 and $60,000, respectively. Cost of goods sold for the year is $240,000.
80,000+100,000/2= 90,000 450,000/90,000=5 times 365/5= 73 days 73 days
The lower of cost and net realizable value method was developed to Multiple choice question. provide an alternative to the FIFO, LIFO, and weighted-average methods. avoid reporting inventory at an amount that exceeds the benefits it provides. prevent the company from selling the inventory below its original cost.
avoid reporting inventory at an amount that exceeds the benefits it provides.
cost of goods sold equals
beginning inventory + net purchases - ending inventory
A periodic inventory system measures cost of goods sold by: Multiple choice question. estimating the amount of inventory sold. making entries to the inventory account for each purchase and sale. debiting cost of goods sold for all purchases of inventory. counting inventory at the end of the period.
counting inventory
The Blank______ method of valuing inventory was developed to avoid reporting inventory at an amount that is Blank______ than the benefits it can provide. Multiple choice question. lower of cost and net realizable value; greater lower of cost and sales revenue; greater cost-benefit; greater lower of cost and net realizable value; smaller cost-benefit; smaller lower of cost and sales revenue; smaller
lower of cost and net realizable value; greater
work in progress inventory
products in the process of being manufactured but not yet complete
A multiple-step income statement reports multiple levels of
profitability, income, earnings, profit
In a periodic inventory system, the purchase of inventory is debited to
purchases
inventory includes the cost of components that will become part of the finished product but have not yet been used in production.
raw materials
Which of following best describes a merchandising company? Multiple Choice A company that purchases products that are primarily in finished form for resale to customers. A company that produces products from raw materials, labor, and overhead. A company whose revenues exceed expenses. A company that provides services to its customers.
A company that purchases products that are primarily in finished form for resale to customers.
Which inventory costing method assumes that the inventory's costs flow out in the same order the goods are received? Multiple choice question. FIFO Weighted average LIFO
FIFO
When prices rise, which inventory method tends to result in lower income and a lower tax liability? Multiple choice question. FIFO NIFO Weighted-average cost LIFO
LIFO
Which cost flow assumption must be used for financial reporting if it is also used for tax reporting? Multiple Choice Weighted-average. Any assumption can be used regardless of the tax reporting. FIFO. LIFO.
LIFO
Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production. Multiple choice question. Raw materials inventory Merchandise inventory Work-in-process inventory Finished goods inventory
Raw materials inventory
Meller purchases inventory on account. As a results, Meller's Multiple choice question. liabilities will decrease. income will decrease. assets will increase. stockholders' equity will decrease.
assets will increase
The LIFO method assumes that:
last units purchased are the first ones sold
Inventory is reported on the balance sheet at:
the lower of original cost and net realizable value
Which of the following items are readily available from an inventory account under the perpetual inventory system? Multiple select question. sales revenue beginning inventory balance ending inventory balance freight-out individual purchases cost of units sold
beginning inventory balance ending inventory balance individual purchases cost of units sold
Using a perpetual inventory system, the purchase of inventory on account is recorded with a: Debit to Cost of Goods Sold. Debit to Inventory. Credit to Sales Revenue. Debit to Accounts Payable.
debit to inventory
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to: Multiple select question. decrease an asset and increase an expense increase an asset and decrease an expense increase an asset and increase revenue decrease an asset and decrease revenue
decrease an asset and increase an expense increase an asset and increase revenue
A company's gross profit ratio measures: Multiple Choice The number of days the average inventory is held. The average amount of sales revenue per unit of inventory sold during the year. The amount by which the sale of inventory exceeds its cost per dollar of sales. The number of times the company sells its average inventory balance during the year.
the amount by which the sale of inventory exceeds its cost per dollar of sales
The balance of the Cost of Goods Sold account at the end of the year represents: Total purchases of inventory for the year. The cost of inventory not sold in the current year. The cost of inventory sold in the current year. The total sales revenue to customers.
the cost of inventory sold in the current year
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) Multiple select question. total assets increase total assets decrease net income increases stockholders' equity decreases stockholders' equity increases
total assets increase net income increases stockholders' equity increases
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? Multiple select question. Debit Cost of Goods Sold $700; credit Inventory $700 Debit Cost of Goods Sold $700; credit Net Income $300; credit Service Revenues $1,000 Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 Debit Cost of Goods Sold $1,000; credit Inventory $1,000
Debit Cost of Goods Sold $700; credit Inventory $700 Debit Accounts Receivable $1,000; credit Sales Revenue $1,000
The gross profit ratio measures: How quickly the company receives inventory from its suppliers. How many times during the year a company sells its average inventory balance. The amount by which the sale of inventory exceeds its cost per dollar of sales. The ratio of net income to net sales.
the amount by which the sale of inventory exceeds its cost per dollar of sales
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income? Multiple choice question.
LIFO
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 primary reason for the popularity of LIFO is that it gives: Simplified recordkeeping. A lower income tax obligation when inventory costs are rising. Better matching of physical flow and cost flow. A simpler method to apply.
lower income tax obligation when inventory costs are rising
The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a Blank______ income statement.
multiple-step
Inventory is defined as: Multiple Choice The cost of goods sold to customers during the year. Any assets of the company that can be sold. The amount of cash received from the sale of goods to customers during the year. Items a company intends for sale to customers.
Items a company intends for sale to customers.
Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue? Lower of cost and net realizable value. LIFO. FIFO. Weighted-average.
LIFO
Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces? Multiple choice question. Specific identification FIFO Weighted-average LIFO
LIFO
cost flow assumption more realistically matches the current cost of inventory with current sales revenue.
LIFO
Merchandising Company
companies that purchase inventories that are primarily in finished form for resale to customers
manufacturing company
company that produce inventories they sell, rather than buying from suppliers in finished form
Gross profit is calculated as net sales minus:
cost of goods sold
gross profit ratio
gross profit/net sales
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
A perpetual inventory system measures cost of goods sold by: Making entries to the inventory account for each purchase and sale. Counting inventory at the end of the period. Estimating the amount of inventory sold. Debiting cost of goods sold for all purchases of inventory.
making entries to the inventory account for each purchase and sale
What type of company purchases raw materials and makes goods to sell? Multiple choice question. Retailers Wholesalers Manufacturers
manufacturers
Companies that produce the inventory they sell are referred to as
manufacturing
The specific identification method (select all that apply): Multiple select question. matches each unit of inventory with its actual cost is not an acceptable method of accounting would be beneficial to a company that makes inexpensive products with high sales volume would be beneficial to a company that makes fine jewelry
matches each unit of inventory with its actual cost would be beneficial to a company that makes fine jewelry
Which of the following levels of profitability in a multiple-step income statement represents all revenues less all expenses? Multiple Choice Net income. Operating income. Gross profit. Income before income taxes.
net income
Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs? Multiple choice question. Both periodic and perpetual inventory systems Perpetual inventory system Periodic inventory system
perpetual
inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.
perpetual
Neumann Company can determine the cost of inventory still on hand by referring to the inventory account. Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.
perpetual inv. system periodic inv. system
Peter Company recognizes cost of goods sold each time it recognizes a sale. Sherman Company recognizes cost of goods sold after completing a physical inventory.
perpetual inv. system periodic inv. system
The inventory turnover ratio directly measures Blank______. Multiple choice question. the days it takes to sell its average inventory balance the times per period the average inventory balance is sold how many days it takes to collect its sales of inventory sold on account
the times per period the average inventory balance is sold
The inventory turnover ratio measures: How many days it takes to collect its sales of inventory sold on account. How many times the company purchases inventory during the current reporting period. The times per period the average inventory balance is sold. The portion of inventory that becomes obsolete each period.
the times per period the average inventory balance is sold
For a manufacturing company, the combination of the cost of raw materials, direct labor, and overhead for inventory that has not yet completed production is known as:
work-in process
Which of the following accounts would be found in the balance sheet of a manufacturing company? Multiple choice question. Merchandise inventory Cost of goods sold Work in process
work-in-process
inventory refers to the products that have been started in production, but are still incomplete. Multiple choice question.
work-in-process
Freight-in is Multiple choice question. a selling expense. treated as a miscellaneous expense. included as a cost of inventory.
included as a cost of inventory
Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are Multiple choice question. treated as a selling expense. paid by the supplier. included in Gerald's inventory.
included in Gerald's inventory
Gross Profit
net sales - cost of goods sold
A company has beginning inventory for the year of $10,500. During the year, the company purchases inventory for $170,000 and ends the year with $28,000 of inventory. The company will report cost of goods sold equal to:
152,500
A company has beginning inventory for the year of $12,000. During the year, the company purchases inventory for $150,000 and ends the year with $28,000 of inventory. The company will report cost of goods sold equal to: Multiple Choice$150,000.$134,000.$166,000.$178,000.
134,000
Tyler Toys has beginning inventory for the year of $19,900. During the year, Tyler purchases inventory for $233,000 and has cost of goods sold equal to $237,000. Tyler's ending inventory equals: Multiple Choice$19,900.$20,200.$23,900.$15,900.
15,900
Tyler Toys has beginning inventory for the year of $19,700. During the year, Tyler purchases inventory for $238,000 and has cost of goods sold equal to $241,000. Tyler's ending inventory equals:
16,700 beg in. + purchases - cogs
For the year, Sealy Incorporated reports net sales of $50,000, cost of goods sold of $40,000, and an average inventory balance of $5,000. What is Sealy's gross profit ratio?
20%
For the year, Simmons Incorporated reports net sales of $100,000, cost of goods sold of $80,000, and an average inventory balance of $40,000. What is Simmons' gross profit ratio?
20% ((net sales-cost of goods sold)/net sales)
In what order would the following appear on a company's multi-step income statement? 1. net income 2. gross profit 3. sales revenues 4. cost of goods sold 5. operating expenses Multiple Choice3, 4, 2, 5, 13, 4, 5, 2, 11, 2, 3, 4, 53, 1, 2, 5, 4
3,4,2,5,1
For the current year, Theta Corporation has beginning and ending inventories of $40,000 and $60,000, respectively. Cost of goods sold for the year is $240,000. What is the company's inventory turnover ratio?
40,000+6,000/2 = 50,000 240,000/50,000= 4.8 4.8 times
During the year, Wrong Company sells 470 remote-control airplanes for $110 each. The company has computed Cost of Goods Sold to be $41,700 and ending inventory to $23,300. Based on this information, compute Wrong's sales revenue. Multiple Choice$51,700$65,000 $10,000 $41,700
51,700
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? Multiple choice question. Debit Accounts Receivable $2,000; credit Inventory $2,000 Debit Cost of Goods Sold $1,500; credit Sales Revenue $1,500 Debit Inventory $1,500; credit Cost of Goods Sold $1,500 Debit Cost of Goods Sold $1,500; credit Inventory $1,500
Debit Cost of Goods Sold $1,500; credit Inventory $1,500
Which cost flow assumption generally results in the highest reported amount of net income in periods of rising inventory costs? Multiple Choice Income will be the same under each assumption. FIFO. Weighted-average. LIFO.
FIF
Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold? Multiple choice question. LIFO FIFO Weighted-average
FIFO
For internal record keeping, most companies carry their inventory using the Blank______ basis. Multiple choice question. average cost LIFO FIFO specific identification
FIFO
For internal record keeping, most companies carry their inventory using the Blank______ basis. Multiple choice question. specific identification LIFO FIFO average cost
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? Multiple choice question. LIFO FIFO
FIFO
Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption? Multiple choice question. FIFO LIFO Weighted-average
FIFO
Which inventory cost flow method approximates the physical flow of inventory items? Multiple choice question. LIFO FIFO Weighted-average cost
FIFO
Most closely approximates the actual physical flow of inventory Provides better matching of current revenues with current inventory cost
FIFO LIFO
The definition of inventory includes which of the following items? Multiple select question. Items held for resale Items currently in production for future sale Items held for use or disposal Materials used currently in the production of goods to be sold
Items held for resale Items currently in production for future sale Materials used currently in the production of goods to be sold
When prices increase, the inventory method tends to decrease a company's tax liability during a particular fiscal period.
LIFO
When prices increase, the. inventory method provides the best matching of revenue and expenses.
LIFO
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 Multiple choice question. FIFO adjustment inventory conversion LIFO adjustment
LIFO adjustment
The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the Multiple choice question. FIFO cost LIFO savings LIFO reserve FIFO reserve
LIFO reserve
The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the Multiple choice question. LIFO reserve FIFO reserve Inventory reserve
LIFO reserve
A multiple-step income statement provides the advantage of: Multiple Choice Separating revenues and expenses based on their different types of activities. Placing all revenues before all expenses. Placing all revenues after all expenses. Excluding the effects of income taxes in the calculation of net income.
Separating revenues and expenses based on their different types of activities.
A company's inventory turnover ratio measures: Multiple Choice The average cost at which inventory was purchased during the year. The quantity of inventory remaining at the end of the year. The number of times the company sells its average inventory balance during the year. The profitability on sales of inventory during the year.
The number of times the company sells its average inventory balance during the year.
The primary difference between the periodic and perpetual inventory systems is:
The perpetual system maintains a continual record of inventory transactions, whereas the periodic system records these transactions only at the end of the period.
Which of the following represent reasons why managers closely monitor inventory levels? Multiple select question. To ensure that sufficient units are available. To increase the average days in inventory. To minimize costs of inventory write-downs due to obsolete inventory.
To ensure that sufficient units are available. To minimize costs of inventory write-downs due to obsolete inventory.
Which of the following accounts are typically reported in the balance sheet of a manufacturing company? Multiple select question. Cost of goods sold Work in process Finished goods Raw materials
Work in process Finished goods Raw materials
A manufacturer's inventory consists of what type of inventory? Work-in-process. Raw materials. All of the other answers are included in a manufacturer's inventory. Finished goods.
all
the cost of inventory cost flow assumptions affects which of the following accounts gross profit cogs inventory
all
The cost of unsold inventory at the end of the year is classified as a(n) ______ in the ______. Expense; Income statement Revenue; Income statement Asset; Balance sheet Liability; Balance sheet
asset, balance sheet
Using the perpetual inventory system, what is the effect of a sale of inventory on assets? Multiple select question. assets increase by the cost of the inventory assets increase by the sales price of the inventory assets decrease by the sales price of the inventory assets decrease by the cost of the inventory
assets increase by the sales price of the inventory assets decrease by the cost of the inventory
The lower of cost and net realizable value method was developed to Multiple choice question. avoid reporting inventory at an amount that exceeds the benefits it provides. prevent the company from selling the inventory below its original cost. provide an alternative to the FIFO, LIFO, and weighted-average methods.
avoid reporting inventory at an amount that exceeds the benefits it provides.
Where is inventory reported in the financial statements? Multiple choice question. Balance sheet as a current asset Income statement as revenue Balance sheet as a noncurrent asset Statement of cash flows as an investing activity
balance sheet as current asset
Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.) Multiple select question. cost of goods sold. current assets. inventory. liabilities.
cost of goods sold inventory
The inventory turnover ratio is measured as:
cost of goods sold divided by average inventory
Inventory Turnover Ratio
cost of goods sold/average inventory
Which of the following represents the balance of Cost of Goods Sold at the end of the year? Multiple Choice The cost of inventory at the beginning of the year. The cost of inventory purchased during the year. The cost of inventory not yet sold by the end of the year. The cost of inventory sold during the year.
cost of inventory sold during the year
In a perpetual inventory system, the purchase of inventory is debited to: Accounts Payable. Inventory. Purchases. Cost of Goods Sold.
costs of goods sold
Under a perpetual inventory system: Multiple Choice Inventory purchases are recorded only at the end of the period. Purchase discounts are not recorded. Cost of good sold is recorded with a period-end adjusting entry. Cost of goods sold is recorded with each sale
costs of goods sold is recorded with each sale
Inventory is classified as Multiple choice question.
current asset
Inventory is typically reported as a(n):
current asset on the balance sheet
Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following? Multiple choice question. Debit Purchases Debit Accounts Payable Debit Inventory Debit Sales Revenue
debit inventory
The Work-in-Process inventory account typically includes which costs? (Select all that apply.) Multiple select question. inventory storage costs direct labor indirect manufacturing costs raw materials
direct labor indirect manufacturing costs raw materials
Inventory does not include: Assets intended to be sold in the normal course of business. Materials used in the production of goods to be sold. Assets currently in production for normal sales. Equipment used in the manufacturing of assets for sale.
equipment used in the manufacturing of assets for sale
cost of goods sold is An expense account. A permanent equity account. A revenue account. An asset account.
expense account
Which inventory account consists of the cost of items for which the manufacturing process is complete? Multiple choice question. Raw materials inventory Merchandise inventory Work-in-process inventory Finished goods inventory
finished goods
inventory consists of items for which the manufacturing process is complete.
finished goods
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to: Multiple select question. increase an asset and decrease an expense increase an asset and increase revenue decrease an asset and decrease revenue decrease an asset and increase an expense
increase an asset and increase revenue decrease an asset and increase an expense
Purchasing inventory on account: Multiple select question. increases assets increases liabilities increases equity decreases assets decreases equity
increases asset increases liabilities
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: Multiple choice question. operating expenses inventory revenue gains and losses
inventory
Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following? Multiple choice question. Debit Purchases Debit Accounts Payable Debit Sales Revenue Debit Inventory
inventory
Fan Company purchases inventory on account. The entry to record this purchase using a perpetual inventory system would include a debit to: Multiple Choice Purchases. Cost of Goods Sold. Accounts Payable. Inventory.
inventory
Items held for sale in the normal course of business are referred to as
inventory
Margo records 300 units of inventory to be bought and held for resell. debit..
inventory
Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because: Multiple choice question. inventory costs are incurred solely on the balance sheet date. inventory costs generally change over time. inventory costs have not yet been incurred.
inventory costs change generally over time
ratio shows the number of times the firm sells its average inventory balance during a reporting period.
inventory turnover
Gross Profit is Multiple choice question. Revenue minus Expenses. Revenue minus Inventory. Beginning Inventory plus Purchases minus Ending Inventory. Net Sales Revenue minus Cost of Goods Sold.
net sales rev - cogs
On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as revenues and expenses.
nonoperating
Revenues and expenses arising from activities that are not part of the company's operations are classified as Blank______ revenues and expenses.
nonoperating
Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming
old, outdated
Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are: Multiple choice question. treated as a selling expense. deducted from Ronald's inventory. paid by the supplier.
paid by the seller
Freight-in on inventory purchases is typically recognized as Multiple choice question. cost of goods sold when paid. selling and administrative expenses. part of the cost of purchasing inventory.
part of the cost of purchasing inventory
Gross profit is defined as: Multiple Choice All revenues minus all expenses. Sales Revenue minus Cost of Goods Sold. Sales Revenue minus Operating Expenses. Income before Income Tax Expense.
sales revenue minus cogs
Which of the following methods are not used for inventory costing? (Select all that apply.) Multiple select question. Simple-average FIFO Weighted-average Specific identification NIFO LIFO
simple-average NIFO
The inventory costing method that matches each unit of inventory with its actual cost is referred to as the Blank______ method. Multiple choice question. weighted-average matching unit actual cost specific identification
specific identification
The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method. Matching unit. Weighted-average. Specific identification. Actual cost.
specific identification
The LIFO adjustment is used internally to convert the inventory Multiple choice question. to the FIFO basis. to the LIFO basis. to the weighted average basis.
the LIFO basis
Due to technological advances in recent years, most companies use a perpetual inventory system to track inventory purchases and sales.
true
The cost of inventory sold during a period is reported on the income statement.
true
The costs of beginning inventory plus additional purchases during the year make up the cost of inventory available for sale.
true
In a perpetual inventory system, when a company sells inventory on account, how many entries are required? Multiple choice question. One Two Zero Three
two
finished goods
units of product that have been completed but not yet sold to customers
FOB shipping point means title to the goods passes: Multiple choice question. when they arrive at the destination. when they are shipped.
when they are shipped