Chapter 6 SmartBook

Smith Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $690,000. Its inventory as of December 31, 2016, was $758,100 at year-end costs and the cost index was 1.05. What was DVL inventory on December 31, 2016? a. $722,000 b. $723,600 c. $724,500 d. $758,100

$723,600 $758,100/1.05 = $722,000 giving 2 layers of $690,000 and $32,000. $690,000 x 1.0 = $690,000 $32,000 x 1.05 = $33,600 $690,000 + $33,600 = $723,600

Doris recently started her position at Monro Company. The company uses the dollar-value LIFO inventory method. On her first day at work, Doris was asked to calculate the cost index for a new inventory layer. The company's records reveal that the cost in terms of the base year was $50,000 and the cost in terms of the layer year was $100,000. What is the cost index for the new layer? a. 0.50 b. 2 c. 1

2

True

A company may use more than one inventory cost method. t or F

FIFO

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

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

Blank 1: inventory

What type of expenditures should be included in the cost of inventory of a manufacturing company? (Select all that apply.) a. Expenditures necessary to bring inventory to sales location. b. Cost of storing inventory after it has arrived at sales location. c. Expenditures necessary to acquire inventory.

Expenditures necessary to bring inventory to sales location. Expenditures necessary to acquire inventory.

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

FIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold? FIFO a. Weighted-average b. LIFO c. FIFO

FIFO In a period of rising prices, FIFO results in goods with the lowest cost beings old first resulting in the lowest cost of goods sold

when they are shipped.

FOB shipping point means title to the goods passes

FIFO

For internal record keeping, most companies carry their inventory using the _____ basis.

Items a company intends to sell in the normal course of business, has in production for future sale, or uses currently in production, are all examples of what? a. Inventory b. Work in process c. Raw materials d. Investments

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: Multiple choice question. Purchases Inventory Raw Materials Cost of Goods Sold

Inventory

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

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

If a company uses _____ to measure taxable income, they must use the same method for external financial reporting. a. Average cost b. LIFO c. FIFO

LIFO

Another name for the LIFO reserve account is a. LIFO allotment. b. LIFO asset. c. LIFO allocation. d. LIFO allowance.

LIFO allowance.

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

LIFO reserve

What type of company purchases raw materials and makes goods to sell? Multiple choice question. Manufacturers Wholesalers Retailers

Manufacturers

Wholesale and retail companies <<<--->>> Purchase goods that are primarily in completed form.

Manufacturing companies <<<--->>> Purchase goods that are used to produce another product.

The goods a wholesale company purchases in finished form are referred to as what? a. Merchandise inventory b. Manufactured inventory c. Finished goods

Merchandise inventory

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

Perpetual inventory system matches

is allowed to use the FIFO, LIFO, or Weighted-average cost flow assumptions.

Peter Company, a produce distributer, always tries to sell its oldest produce first. Peter company?

Which of the following are disadvantages of unit LIFO? (Select all that apply.) a. Disallowed by U.S. GAAP b. Possibility of LIFO liquidation c. Inventory pools are costly to implement d. Significant recordkeeping costs

Possibility of LIFO liquidation Significant recordkeeping costs

increases liabilities increases assets

Purchasing inventory on account:

newest, recent, last, latest, or new

The FIFO inventory method assumes that units remaining in ending inventory are the ________ units purchased.

free on board.

The shipping term FOB stands for

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

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

stockholders' equity increases net income increases total assets increase

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)

Expense

When inventory is sold, the cost of inventory is recognized as a?

Which of the following accounts would be found on the balance sheet of a manufacturing company? a. cost of goods sold b. work in process c. merchandise inventory

Work in process

Inventory is classified as Multiple choice question. a current liability. a current asset. a noncurrent asset. a revenue.

a current asset.

The dollar-value LIFO method extends the concept of inventory pools by allowing companies to a. avoid all inventory liquidations. b. combine all goods in one single inventory pool. c. combine a large variety of goods in one pool.

combine a large variety of goods in one pool.

Select all that apply 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.

When inventory quantities _____ during a period, out-of-date inventory layers are liquidated and cost of goods sold will match noncurrent costs with current selling prices in a LIFO inventory costing system. a. increase b. decline c. stay the same

decline

True or false: A periodic inventory system allows management to determine the amount of goods on hand without having to take a physical count. a. True b. False

false

The FIFO method assumes that units sold are the _________ units acquired and that units remaining in ending inventory are the ________ units purchased. a. first; last b. first; first c. last; first d. last; last

first; last

Ownership of inventory at the end of the accounting period is determined for (Select all that apply.) a. unfulfilled sales orders. b. goods shipped to customers. c. unfulfilled purchase orders. d. goods shipped by suppliers.

goods shipped to customers. goods shipped by suppliers.

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

incurred several years earlier.

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

inventory

The _____ inventory method assumes that the units in ending inventory were the items acquired first. a. last-in, first-out b. weighted average c. first-in, first-out

last-in, first-out

The layer year cost index is calculated by dividing the cost in ______ year by the cost in ______ year. a. first; last b. base; layer c. last; first d. layer; base

layer; base

Use of LIFO inventory pools reduce the chance of unintentional LIFO layer _____.

liquidation

The specific identification method (select all that apply): a. is not an acceptable method of accounting b. matches each unit of inventory with its actual cost c. would be beneficial to a company that makes fine jewelry d. would be beneficial to a company that makes inexpensive products with high sales volume

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

Which inventory system allocates cost of goods available for sale only at the end of each reporting period? a. both periodic and perpetual b. periodic inventory system c. perpetual inventory system

periodic inventory system

Freight-in costs are debited to Inventory in this inventory system:

perpetual only

The dollar-value LIFO (DVL) method (Select all that apply.) a. reduces the risk of liquidation of layers. b. increases the risk of liquidation of layers. c. simplifies recordkeeping. d. prevents liquidation of layers.

reduces the risk of liquidation of layers. simplifies recordkeeping.

LIFO inventory pools a. simplify recordkeeping. b. prevent liquidation of layers. c. result in lower cost of goods sold.

simplify recordkeeping.

A DVL pool is made up of items a. that have similar physical characteristics. b. from different purchases within the same year. c. that are likely to have similar cost change pressures.

that are likely to have similar cost change pressures.

High recordkeeping costs and possible LIFO liquidation are disadvantages of a. dollar value LIFO. b. LIFO inventory pools. c. unit LIFO.

unit LIFO.

Which of the following accounts are typically reported on the balance sheet of a manufacturing company? (Select all that apply.) a. cost of goods sold b. work in process c. merchandise inventory d. finished goods e. raw materials

work in process finished goods raw materials

Higher, greater

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, greater, more, or larger

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.

LIFO reserve

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

LIFO

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

merchandising

Companies that serve as intermediaries between manufacturers and end users typically are referred to as ____ companies.

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

LIFO

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

LIFO

Perpetual inventory system

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

Simple-average NIFO

Which of the following methods are not used for inventory costing? (Select all that apply.)

Merchandising, Merchant, Retail, Wholesale, or Merchandise

companies purchase inventory that is primarily in finished form and ready for resale to customers.

In a perpetual inventory system the inventory account is a. adjusted at the end of each month. b. continually adjusted. c. adjusted at the end of the year.

continually adjusted.

A LIFO liquidation occurs when inventory quantities ______. a. decrease b. stay the same c. increase

decrease

Which inventory system allocates cost of goods available for sale only at the end of each reporting period? a. perpetual inventory system b. both periodic and perpetual c. periodic inventory system

periodic inventory system

A _____ inventory system recognizes cost of goods sold each time a sale occurs; a _____ inventory system decreases inventory each time a sale occurs. a. perpetual; periodic b. periodic; periodic c. periodic; perpetual d. perpetual; perpetual

perpetual; perpetual

Where is inventory reported in the financial statements? Multiple choice question. Statement of cash flows as an investing activity Balance sheet as a current asset Income statement as revenue Balance sheet as a noncurrent asset

Balance sheet as a current asset

Which inventory costing method matches each unit sold with its actual cost? a. Specific identification b. FIFO c. Average cost d. LIFO

Specific identification

A(n) _____ inventory system adjusts for each change caused by a purchase, a sale, or a return of merchandise.

perpetual

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

lower, smaller, or less

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be________________ than ending inventory determined using the FIFO inventory assumption.

Which inventory costing method assumes that items sold are those that were acquired first? a. FIFO b. Average cost c. LIFO

LIFO

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

Periodic inventory system matches

Advantages of using LIFO inventory pools include which of the following? (Select all that apply.) a. Account for each type of inventory separately b. Reduce the risk of LIFO layer liquidations c. Simplify recordkeeping

Reduce the risk of LIFO layer liquidations Simplify recordkeeping

first, earliest, or oldest

The FIFO method assumes that units sold are the____________ units acquired.

the most recent units purchased.

The LIFO inventory method assumes that the units sold are

the oldest units in inventory.

The LIFO inventory method assumes that the units that remain in ending inventory are?

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

The definition of inventory includes which of the following items?

What is included in the cost of merchandise inventory? (Select all that apply.) a. The purchase price of the goods. b. Necessary costs incurred to get the goods in location for sale. c. Sales commissions paid to the wholesale company employees.

The purchase price of the goods. Necessary costs incurred to get the goods in location for sale.

multiple-step

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.

True

True or false: A company may use more than one inventory cost method.

False

True or false: The inventory cost flow assumption must match the physical flow of inventory units.

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

Two

Balance sheet as a current asset

Where is inventory reported in the financial statements?

FIFO

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

The average cost method assumes that cost of goods sold consists of a. the most recently purchased units. b. the oldest units in inventory. c. a mixture of all the goods available for sale.

a mixture of all the goods available for sale.

The average cost method assumes that ending inventory consists of a. the oldest units in inventory. b. the most recently purchased units. c. a mixture of all the goods available for sale.

a mixture of all the goods available for sale.

The dollar-value LIFO (DVL) inventory method a. allows a broader range of goods to be included in pools. b. requires pooled inventory to have similar physical characteristics. c. complicates recordkeeping procedures.

allows a broader range of goods to be included in pools.

Cost flow _____ are made to assign dollar amounts to the physical quantities of goods sold and remaining in ending inventory.

assumptions

Determining ownership of goods that are in transit at the end of the accounting period is important to a. determine an accurate arrival time. b. determine who must pay shipping. c. assure proper inventory cutoff.

assure proper inventory cutoff.

A periodic inventory system allocates cost of goods available for sale _____; a perpetual inventory system allocates cost of goods available for sale _____. a. at the end of the period; at the end of the period b. each time goods are sold; at the end of the period c. at the end of the period; each time goods are sold d. each time goods are sold; each time goods are sold

at the end of the period; each time goods are sold

The definition of inventory includes which of the following items? (Select all that apply.) a. items held for resale b. items held for use or disposal c. items currently in production for future sale d. items used currently in the production of goods to be sold

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

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method. Multiple choice question. weighted-average matching unit actual cost specific identification

specific identification

Pernell Company reported LIFO reserves of $150,000 and $100,000 in 2016 and 2015, respectively. The company utilized the FIFO assumption for internal purposes. Based on this information, we can conclude that Pernell's pretax income for the 2016 fiscal year would have been a. $50,000 lower if it had used FIFO. b. $150,000 higher if it had used FIFO. c. $150,000 lower if it had used FIFO. d. $50,000 higher if it had used FIFO.

$150,000 higher if it had used FIFO.

Gerhard Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased at least 1,200 units, COGS would have been a. $1,000 lower. b. $2,000 lower. c. $2,000 higher. d. $1,000 higher.

$2,000 higher.

Joachim Company has 300 units costing $10 per unit in beginning inventory. During the year, the company purchases an additional 1,000 units costing $20 per unit and sells 1,200 units. The company has used the LIFO inventory method for the past 5 years. If the company had purchased 1,200 units, pretax income would have been a. $1,000 lower. b. $1,000 higher. c. $2,000 lower. d. $2,000 higher.

$2,000 lower. Currently cost of goods sold is computed using the 1,000 units at $20 plus 200 units at $10 so the units from beginning inventory are liquidated. If they had purchased at least 1,200 units, cost of goods sold would have been higher resulting in lower pretax income.

Western Company adopted dollar-value LIFO (DVL) as of January 1, 2016, when it had an inventory of $715,000. Its inventory as of December 31, 2016, was $815,400 at year-end costs and the cost index was 1.08. What was DVL inventory on December 31, 2016? a. $722,200 b. $755,000 c. $815,400 d. $758,200

$758,200 $815,400/1.08 = $755,000 giving 2 layers of $715,000 and $40,000. $715,000 x 1.0 = $715,000 $40,000 x 1.08 = $43,200 $715,000 + $43,200 = $758,200

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be ____ than ending inventory determined using the FIFO inventory assumption.

Blank 1: lower, smaller, or less

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

Blank 1: manufacturers or manufacturing

Rudy Company reports gross sales revenue of $5.2 million, net sales revenue of $5 million, and cost of goods sold of $3 million. Rounding to the nearest percent, the company's gross profit ratio would be a. 58%. b. 40%. c. 60%. d. 42%.

40%. Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($5 million -$3 million)/$5 million

Chase Company reports gross sales revenue of $7.5 million, net sales revenue of $7 million, and cost of goods sold of $3.5 million. Rounding to the nearest percent, the company's gross profit ratio would be a. 57%. b. 47%. c. 53%. d. 50%.

50%. Gross profit ratio is computed as gross profit/NET SALES. Be sure to use the net sales number, not gross sales. ($7 million -$3.5 million)/$7 million

inventory

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:

income

A multiple-step income statement reports multiple levels of

counting inventory at the end of the period.

A periodic inventory system measures cost of goods sold by

LIFO

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

Where is inventory reported in the financial statements? Multiple choice question. Income statement as revenue Statement of cash flows as an investing activity Balance sheet as a current asset Balance sheet as a noncurrent asset

Balance sheet as a current asset

The _____ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.

Blank 1: FIFO or first-in-first-out

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.

Blank 1: perpetual Blank 2: periodic

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

Cost of Goods Sold Inventory

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income? a. weighted-average b. LIFO c. FIFO

LIFO In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold and lower income.

Assuming that prices rise over time, which inventory cost flow assumption will result in the highest cost of goods sold? a. LIFO b. FIFO c. Weighted-average

LIFO In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in higher cost of goods sold.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory? a. Weighted-average b. FIFO c. LIFO

LIFO In a period of rising prices, LIFO results in goods with the highest cost being sold first resulting in lower ending inventory.

inventory. cost of goods sold.

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

Orange Co., a computer retailer, shows the following selected assets on its balance sheet. Indicate which account would be properly classified as inventory. a. Office supplies b. Patents c. Desks d. Mouse pads

Mouse pads

Gross Profit is Multiple choice question. Revenue minus Expenses. Net Sales Revenue minus Cost of Goods Sold. Beginning Inventory plus Purchases minus Ending Inventory. Revenue minus Inventory.

Net Sales Revenue minus Cost of Goods Sold.

A periodic inventory system (Select all that apply.) a. does not continuously track the cost of merchandise sold. b. continuously tracks the cost of merchandise sold. c. continuously tracks the quantity of merchandise. d. does not continuously track the quantity of merchandise.

does not continuously track the cost of merchandise sold. does not continuously track the quantity of merchandise.

The cost of inventory includes (Select all that apply.) a. the cost to store the inventory once it arrives at desired location b. expenditures to acquire the inventory c. the cost to bring inventory to its desired condition d. the cost to bring inventory to its desired location

expenditures to acquire the inventory the cost to bring inventory to its desired condition the cost to bring inventory to its desired location

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

fifo

Inventory cost flow assumptions can be used to assign dollar amounts to (Select all that apply.) a. goods sold. b. sales revenue. c. purchases. d. ending inventory.

goods sold. ending inventory.

The gross profit ratio is computed as _____ divided by net sales. a. cost of goods sold b. revenue c. net income d. gross profit

gross profit

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

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

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

Select all that apply Purchasing inventory on account: Multiple select question. decreases assets increases equity increases liabilities decreases equity increases assets

increases liabilities increases assets

A _____ company resells goods while a _____ company produces goods. a. merchandising; retail b. manufacturing; retail c. manufacturing; merchandising d. merchandising; manufacturing

merchandising; manufacturing

The LIFO inventory method assumes that the units that remain in ending inventory are a. the most recent units purchased. b. an average of all units. c. the oldest units in inventory. d.

the oldest units in inventory.

Select all that apply The specific identification method (select all that apply): Multiple select question. is not an acceptable method of accounting 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 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