Chapter 6 SmartBook
Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?
Debit Inventory
Which inventory costing method assumes that the inventory's costs flow out in the same order the goods are received?
FIFO
In a perpetual inventory system, freight costs on purchases are
added to the inventory account.
The lower of cost and net realizable value method was developed to
avoid reporting inventory at an amount that exceeds the benefits it provides.
Beginning inventory plus purchases, plus freight-in, minus purchase discounts and returns, minus ending inventory calculates the amount of:
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.)
cost of goods sold. inventory.
A multiple-step income statement reports multiple levels of
income
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
Items held for sale in the normal course of business are referred to as
inventory
perpetual
inventory
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
Period-end adjustments are necessary for the:
periodic inventory system
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
For internal record keeping, most companies carry their inventory using the _____ basis.
FIFO
The definition of inventory includes which of the following items?
Items currently in production for future sale Items held for resale Materials used currently in the production of goods to be sold
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
Which of the following methods are not used for inventory costing? (Select all that apply.)
NIFO Simple-average
Gross Profit is
Net Sales Revenue minus Cost of Goods Sold.
Which of the following inventory systems requires a physical count in order to determine cost of goods sold?
Periodic inventory system
Which of the following accounts would be found in the balance sheet of a manufacturing company?
Work in process
True or false: Under the perpetual inventory system, an adjusting entry is needed to close temporary inventory-related accounts, record cost of goods sold, and adjust the inventory account balance.
false
Cost of goods sold divided by average inventory is
inventory turnover
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-step
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 ______ revenues and expenses.
nonoperating
If a company uses the periodic inventory system, how many entries are made when a sale occurs?
one
When a sale occurs under the periodic inventory system, we record:
only the sale, but not the related cost of goods sold
In a periodic inventory system, freight-in costs are
recognized in a temporary freight-in account.
Alexandra Inc. utilizes a periodic inventory system. Related to inventory, Alexandra Inc. must record period-end adjustments to:
record cost of goods sold for the period adjust the inventory balance to its proper ending balance close purchase-related temporary accounts
The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.
specific identification
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
In a perpetual inventory system, purchase discounts and purchase returns
directly reduce the Inventory account balance.
Under the ______ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.
perpetual
Which inventory account includes the cost of components that will become part of the finished product but have not yet been used in production.
Raw materials inventory
Freight-in costs are debited to Inventory in this inventory system:
perpetual only
________ __________ inventory includes the cost of components that will become part of the finished product but have not yet been used in production.
raw materials
The ________ inventory cost flow assumption typically approximates the actual physical flow of inventory items of most companies.
FIFO
periodic
purchases
perpetual inventory
freight is added directly to the inventory account
In a perpetual inventory system, when a company sells inventory on account, how many entries are required?
two
Where is inventory reported in the financial statements?
Balance sheet as a current asset
Which of the following correctly reflects the determination of cost of goods sold in a periodic inventory system?
Beginning inventory + net purchases - ending inventory
Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.
Cost of Goods Sold Inventory
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
The _________ cost flow assumption more realistically matches the current cost of inventory with current sales revenue.
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
LIFO adjustment
Which of the following accounts are typically reported in the balance sheet of a manufacturing company?
Work in process Raw materials Finished goods
Periodic inventory
a separate freight-in account is used
Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be
a separate freight-in account.
Accounting errors must be corrected
as soon as they are discovered.
Freight-in is
included as a cost of inventory.
Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are
included in Gerald's inventory.
In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs
incurred several years earlier.
In a perpetual inventory system, when inventory is purchased, the _________ account is debited, whereas in a periodic system, the _________ account is debited.
inventory purchases
___________ __________ ratio shows the number of times the firm sells its average inventory balance during a reporting period.
inventory turnover
Companies that produce the inventory they sell are referred to as
manufacturing
The LIFO adjustment is used internally to convert the inventory
to the LIFO basis.
FOB shipping point means title to the goods passes
when they are shipped
_______ _______ inventory consists of items for which the manufacturing process is complete.
Finished goods
Which inventory account consists of the cost of items for which the manufacturing process is complete?
Finished goods inventory
Which of the following methods are available for costing inventory? (Select all that apply.)
LIFO FIFO Weighted-average Specific identification
Under the periodic inventory system, purchase returns and purchase discounts accounts represent
contra purchases accounts.
The formula for inventory turnover is
cost of goods sold/average inventory
Inventory is classified as
current asset
Robert Skinner, an accountant, discovers an error in accounting for an inventory purchase. He should correct the error
immediately.
Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:
increase an asset and increase revenue decrease an asset and increase an expense
Purchasing inventory on account:
increases assets increases liabilities
Which of the following items are readily available from an inventory account under the perpetual inventory system?
individual purchases cost of units sold ending inventory balance beginning inventory balance
Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming _________
outdated
Purchase returns are recorded in a separate contra purchase account in a _________ inventory system.
periodic
Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?
FIFO
Which inventory cost flow method approximates the physical flow of inventory items?
FIFO
Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:
Inventory
When prices increase, the ________ inventory method provides the best matching of revenue and expenses.
LIFO
Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?
LIFO
The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the
LIFO reserve
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.
Perpetual Periodic
Freight-in costs should be debited to the ______ Inventory account under the inventory system and to a separate Freight-in account under the ________ inventory system.
Perpetual periodic
Perpetual inventory system
Peter Company recognizes cost of goods sold each time it recognizes a sale. Neumann Company can determine the cost of inventory still on hand by referring to the inventory account.
LIFO
Provides better matching of current revenues with current inventory cost
Which of the following represent reasons why managers closely monitor inventory levels?
To ensure that sufficient units are available. To minimize costs of inventory write-downs due to obsolete inventory.
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 purposes of the period-end adjustment in the periodic inventory system include:
close the temporary accounts relating to inventory purchases, discounts, and returns and allowances recognize cost of goods sold relating to sales during the period reflect the proper ending balance in the inventory account
The Work-in-Process inventory account typically includes which costs? (Select all that apply.)
direct labor raw materials indirect manufacturing costs
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.
greater
Net sales revenue minus cost of goods sold is
gross profit.
In times of rising prices, ending inventory determined using the LIFO inventory assumption will be _________ than ending inventory determined using the FIFO inventory assumption.
less
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.
Freight-in on inventory purchases is typically recognized as
part of the cost of purchasing inventory.
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
The inventory turnover ratio directly measures ______.
the times per period the average inventory balance is sold
FOB destination means title to the goods passes
when they arrive at the destination.
_____ inventory refers to the products that have been started in production, but are still incomplete.
work-in-process
The specific identification method (select all that apply):
would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost
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?
FIFO
Periodic inventory system
Sherman Company recognizes cost of goods sold after completing a physical inventory. Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.