Chapter 6: Inventory and Cost of Goods SoldAssignment

4 methods of inventory costing

1. specific identification 2. first-in, first-out 3. last-in, first-out 4. weighted-average cost

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

FIFO

freight charges

FOB shipping point FOB destination FOB = "free on board" and indicates when title passes from the seller to the buyer

Meller purchases inventory on account. As a results, Meller's Multiple choice question. income will decrease. stockholders' equity will decrease. liabilities will decrease. assets will increase.

assets will increase.

Meller purchases inventory on account. As a results, Meller's Multiple choice question. stockholders' equity will decrease. income will decrease. assets will increase. liabilities will decrease.

assets will increase.

Gerald Corporation purchases inventory FOB *shipping point*. The shipping costs are $300. The shipping costs are Multiple choice question. included in Gerald's inventory. paid by the supplier. treated as a selling expense.

included in Gerald's inventory.

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are treated as a selling expense. paid by the supplier. included in Gerald's inventory.

included in Gerald's inventory.

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are Multiple choice question. paid by the supplier. treated as a selling expense. Deducted from Ronald's inventory.

paid by the supplier.

A multiple-step income statement reports multiple levels of

profitability

purchase

to record the purchase of inventory, DEBIT inventory (asset) to show that the company's balance of this asset account has increased

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: operating expenses gains and losses inventory revenue

inventory

perpetual inventory system

recording inventory purchases and sales on a perpetual basis; this info will affect decisions related to purchase orders, pricing, product development, and employee management

periodic inventory system

DOES NOT continually record inventory amounts. Instead, it calculates the balance of inventory once per period, at the end, based on a physical count of inventory on hand

Why do managers choose FIFO

During periods of rising costs, which is the case for most companies, FIFO results in a (1) higher ending inventory (2) lower cost of goods sold (3) higher reported profit than does LIFO

Which of the following methods are NOT used for inventory costing? (Select all that apply.) Multiple select question. Simple-average Weighted-average NIFO Specific identification FIFO LIFO

Simple-average NIFO

multiple-step income statement

companies choose the multiple-step format is to show the revenues and expenses that arise from different types of activities --> better determine the source of a company's profitability

A periodic inventory system measures cost of goods sold by debiting cost of goods sold for all purchases of inventory. estimating the amount of inventory sold. making entries to the inventory account for each purchase and sale. counting inventory at the end of the period.

counting inventory at the end of the period.

when the value of inventory falls below its original cost, companies are required to report inventory at the lower ___

net realizable value of that inventory

However, because inventory costs generall ychange over time, the reported amounts for ending invesntory and costs of goods sold will ___ be the same across inventory reporting methods

not

FOB destination means title to the goods passes when they arrive at the destination. when they are shipped to the customer.

when they arrive at the destination.

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods. Multiple select question. Cost of Goods Sold Inventory Sales Revenue Purchases

Cost of Goods Sold Inventory

For internal record keeping, most companies carry their inventory using the _____ basis. average cost FIFO LIFO specific identification

FIFO

Inventory is a ___

current asset

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. Multiple choice question. lower of cost and net realizable value; smaller lower of cost and sales revenue; greater lower of cost and sales revenue; smaller cost-benefit; smaller cost-benefit; greater lower of cost and net realizable value; greater

lower of cost and net realizable value; greater

The definition of inventory includes which of the following items? (Multiple select question.) Items held for resale Materials used currently in the production of goods to be sold Items currently in production for future sale Items held for use or disposal

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

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

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. FIFO reserve LIFO reserve Inventory reserve

LIFO reserve

Companies that report ___ must also report the difference between the LIFO amount and what that amount would have been if they used FIFO. This difference is called the LIFO ___

LIFO; reserve

Levels of profitability

gross profit operating income income before income taxes

Match each scenario with the type of inventory system. Perpetual inventory system Periodic inventory system choices: - Sherman Company recognizes cost of goods sold after completing a physical inventory. - Peter Company recognizes cost of goods sold each time it recognizes a sale.

Perpetual inventory system matches <--> Peter Company recognizes cost of goods sold each time it recognizes a sale. Peter Company recognizes cost of goods sold each time it recognizes a sale. Periodic inventory system <--> Sherman Company recognizes cost of goods sold after completing a physical inventory. Sherman Company recognizes cost of goods sold after completing a physical 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. provide an alternative to the FIFO, LIFO, and weighted-average methods. prevent the company from selling the inventory below its original cost.

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.) Multiple select question. current assets. cost of goods sold. liabilities. inventory.

cost of goods sold. 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

debit inventory

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

Inventory

includes items a company intends for sale to customers in the ordinary course of business ex. shoes at Payless, grocery items ar Publix Super MArkets, building supplies at The Home Depot inventory also includes unfinished products like lumber/steel/rubber

Purchasing inventory on account: Multiple select question. increases liabilities decreases assets increases assets increases equity decreases equity

increases liabilities increases assets

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs Multiple choice question. incurred solely on the balance sheet date. incurred several years earlier. that have not yet been incurred.

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: gains and losses inventory operating expenses revenue

inventory

Items held for sale in the normal course of business are referred to as .

inventory

Many companies generate revenues by selling ___ rather than a service

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: Raw Materials Inventory Cost of Goods Sold Purchases

inventory

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 choice question. classified single-step multiple-step current

multiple-step