chapter 6 sqmartbook

Which of the following costs are recognized in work in process for a manufacturing company?

overhead raw materials direct labor

FOB destination means title to the goods passes

when they arrive at the destination.

Under a perpetual inventory system, the entry to record the return of goods previously purchased on account was recorded with a debit to Accounts Payable and a credit to Inventory. This entry is:

CORRECT

The primary benefit for choosing this method is that it tends to save taxes.

LIFO

inventory that consists of items for which the manufacturing process is complete?

finished goods

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

lastest

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.

lower of cost and net realizable value; greater

Which of the following accounts would be found in the balance sheet of a manufacturing company?

work in process

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.

A multiple-step income statement reports multiple levels of

income

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

2

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

Which disclosure allows financial statement users to compare companies that use LIFO to companies that use FIFO?

LIFO reserve

Inventory not yet sold is classified as an _____ in the ______ _______

asset in the balance sheet

The shipping term FOB stands for

free on board

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

Cost of goods sold divided by average inventory is

inventory turnover

The _________ __________ ratio shows the number of times the firm sells its average inventory balance during a reporting period.

inventory turnover

Freight-in is recorded as part of ______, whereas freight out is often recorded as ______.

inventory; selling expense

Companies that produce the inventory they sell are referred to as

manufacturers

What type of company purchases raw materials and makes goods to sell?

manufacturers

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

merchandising

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

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for

inventory & cost of goods sold

Which of the following items are readily available from an inventory account under the perpetual inventory system?

-beginning inventory balance -cost of units sold -individual purchases -ending inventory balance

FIFO

Most closely approximates the actual physical flow of inventory

Periodic inventory system

Sherman Company recognizes cost of goods sold after completing a physical inventory.

The LIFO difference (sometimes called LIFO reserve) helps investors

compare the performance of companies that use different cost flow assumptions.

When inventory is sold, the cost of inventory is recognized as an

expense

Barry, Inc.'s sales equal $30,000 and cost of goods sold equals $10,000. Its beginning inventory was $800 and its ending inventory is $1,200. Barry's inventory turnover ratio equals ______ times.

10

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

inventory & costs of goods sold

Revenues and expenses arising from activities that are not part of the company's operations are classified as ______ revenues and expenses.

nonoperating

The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.

specific identification

The lower of cost and net realizable value method causes losses in the value of inventory to be recognized in the period when

the value declines below cost.

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

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

the oldest units in inventory

Berta Company's inventory value has declined during the current period. Berta does not expect to sell its inventory during the current year. Berta should recognize the loss in the period when the inventory

value declines

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

When prices rise, which inventory method tends to result in lower income and a lower tax liability?

LIFO

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

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

LIFO reserve

The weighted average cost method assumes that cost of goods sold consists of

a mixture of all the goods available for sale.

If a company pays freight-in for its inventory, that amount will later be included in

cost of goods sold.

Some companies refer to "cost of goods sold" as

cost of sales cost of merchandise sold cost of products sold

A periodic inventory system measures cost of goods sold by

counting inventory at the end of the period.

inventory is classified as

current asset

Where is inventory classified in the financial statements?

current asset in the balance sheet

Average days in inventory measures

the average time the inventory is held.

The LIFO inventory method assumes that the units sold are

the most recent units purchased

The inventory turnover ratio directly measures ______.

the times per period the average inventory balance is sold

The LIFO adjustment is used internally to convert the inventory

to the LIFO basis.

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?

total assets increase net income increases stockholders' equity increases

Which of the following methods are not used for inventory costing?

NIFO Simple-average

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

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

LIFO

Average days in inventory is calculated as

365 divided by the inventory turnover ratio.

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

FIFO

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

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?

FIFO

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

FIFO

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

FIFO

Which of the following methods are available for costing inventory?

FIFO LIFO Weighted-average Specific identification

The cost of goods not yet sold is recorded in the ______ account, whereas the cost of goods that are sold to customers is recorded in _____.

Inventory; Cost of Goods Sold

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

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

LIFO reserve

Perpetual inventory system

Peter Company recognizes cost of goods sold each time it recognizes a sale.

LIFO

Provides better matching of current revenues with current inventory cost

Which of the following represent reasons why managers closely monitor inventory levels?

To minimize costs of inventory write-downs due to obsolete inventory. To ensure that sufficient units are available.

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

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

Meller purchases inventory on account. As a results, Meller's

assets will increase

The ratio that indicates the approximate number of days the average inventory is held is referred to as the:

average days in inventory

The formula 365 divided by the inventory turnover ratio equals the

average days in inventory.

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides.

Where is inventory reported in the financial statements?

balance sheet as a current asset

"Cost of sales" is another name for which of the following accounts?

cost of goods sold

Catalina Bookstore pays freight on books shipped to its store. The shipping cost is debited to Inventory. When the books are sold, the freight costs pertaining to the books are included in:

cost of goods sold

The formula for inventory turnover is

cost of goods sold divided by average inventory.

The Work-in-Process inventory account typically includes which costs?

direct labor raw materials indirect manufacturing costs

The gross profit ratio is calculated as

gross profit divided by net sales.

Gross profit divided by net sales equals

gross profit ratio.

The purchase discount term, 2/10, n/30, means that the purchaser ______.

has 10 days from the purchase date in which to pay and receive a 2% discount

Purchasing inventory on account:

increases liabilities increases assets

In a LIFO inventory system, inventory costs shown in the balance sheet may be distorted because they may represent costs

incurred several years earlier.

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

inventory

The estimated selling price of inventory less any costs of completion, disposal, and transportation is referred to as:

net realizable value

Gross Profit is

net sales - cost of goods sold

True or false: When goods are sold, the cost of the goods is transferred from the Inventory account to the Cost of Goods Sold account.

true

Work in process inventory refers to inventory where the manufacturing process is_______ whereas finished goods refers to inventory where the manufacturing process is ________

unfinished, complete

Which of the following accounts are typically reported in the balance sheet of a manufacturing company?

work in process raw materials finished goods

The specific identification method

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

Beginning inventory is $20,000. Purchases of inventory during the year are $100,000. Ending inventory is $50,000. What is cost of goods sold?

$70,000 Reason: $20,000 + $100,000 - $50,000 = $70,000.

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

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 primary benefit of LIFO is:

tax savings

Freight-out is

recognized as operating expense

Cellem, Inc.'s beginning inventory is $4,000 and its ending inventory is $2,000. The inventory turnover is 6. Cost of goods sold must equal:

$18,000 Reason: The inventory turnover of 6 equals cost of goods sold divided by average inventory of $3,000 (=($4,000+$2,000)/2). Cost of goods sold equals 6 times $3,000 = $18,000.

Blog Inc., has net sales of $50,000, cost of goods sold of $30,000, and selling expenses of $5,000. Its gross profit is ______.

$20,000 reason: gross profit=sales-cost of goods sold 50,000-30,000 =

Prather Inc. has sales of $100,000, sales returns of $5,000, cost of goods sold of $60,000, and selling expenses of $3,000. Calculate gross profit.

$35,000 Reason: Net sales is $95,000 ($100,000 - 5,000). Net sales of $95,000 less cost of goods sold of $60,000 = $35,000.

Bottom, Inc. paid an invoice for $1,000, with discount terms of 1/7, n/30, within the discount period. The net amount paid was:

$990 Reason: The discount is 1% if paid within 7 days or the full amount is due within 30 days.

Beginning inventory is $60,000. Purchases of inventory during the year are $100,000. Cost of goods sold is $120,000. What is ending inventory?

40,000 Reason: $60,000 + $100,000 - $120,000 = $40,000.

Bernie Corp. uses the FIFO inventory method to calculate cost of goods sold for financial reporting purposes. Which of the following methods can Bernie use for tax purposes?

FIFO and weighted-average only

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

debit inventory

If a company uses a perpetual inventory system, the entry to record the company's return of goods previously purchased on account includes ______ and _____.

debit to Accounts Payable credit to Inventory.

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

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

How is cost of goods sold classified in the financial statements?

expense in the income statement

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

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

merchandising

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming

outdated

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are

paid by the supplier

Under the ________ inventory system, the inventory account reflects purchases during the year, as well as cost of units sold.

perpetual

The estimated selling price of inventory less costs necessary to sell the inventory is referred to as net

realizable value