Chapter 7 SmartBook

To ensure the accuracy of inventory accounted for using a perpetual system, physical counts _____.

Detect shrinkage, detect bookkeeping errors, and detect theft

Companies generally report their accounting method for inventory in the _____.

Notes to the financial statements

How is the lower-of-cost-or-market rule applied when there are more than two types of inventory?

Only the items that have market values lower than the costs will be written down

If Vito, Inc. has an inventory turnover ratio of 5 times, then its days to sell must be:

73 days

Which inventory method is typically used when accounting for expensive and unique inventory items?

Specific Identification

What is the inventory costing method that adds together the total cost of goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

Weighted average cost

The inventory turnover measures the _____.

Number of times the average inventory balance is bought and sold

What might cause the value of inventory to fall below its original cost?

Obsolescence from going out of style, damage, and increased competition

FIFO uses the _____ cost for Cost of Goods Sold on the income statement and the ____ cost for Inventory on the balance sheet

Oldest; newest

Beginning inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first in first out, Cost of Goods Sold equals:

$30

Delta Diamonds had 5 diamonds available for sale this year; 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold one of the diamonds. Using FIFO, it's cost of goods sold for the year ended is:

$500

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds that was purchased on July 9. Using periodic specific identification, it's Cost of Goods Sold is: Then it's inventory:

$550; 500+550+(2x600)= $2,250

What statements are true?

-The inventory costing methods determine the amount of the debit to Cost of Goods Sold and credit to Inventory -Specific identification, weighted average cost, LIFO and FIFO are generally accepted costing methods -The inventory methods apply to both perpetual and periodic inventory systems

Mountain Made started the month with 3 quilts in its beginning inventory that cost $200 each. Mountain Made purchased 20 additional quilts for $210each. At the end of the month, Mountain Made counted it's inventory and found that 5 quilts remained unsold. If Mountain Made uses LIFO periodic, it's Cost of Goods Sold for the month is:

18x210= $3,780

Ending inventory errors in 2019 will ______.

Affect the 2020 goods available for sale but will not affect the 2020 ending inventory

Inventory is reported on the _____. Later, when the inventory is sold, it becomes _____.

Balance sheet as a current asset; Cost of Goods Sold on the income statement

When using the specific identification inventory method, cost of goods sold equals the:

Cost of the actual item sold

What company is more likely to use specific identification to value its inventory and cost of goods sold?

Custom home builder because they sell unique and expensive goods

Inventory costing methods allowed by US GAAP includes 1) specific _____, 2) _____ average, 3) last in _____ out, and 4) first in _____ out

Identification; weighted; first; first

What income statement line items are affected by the inventory method chosen?

Income from operations, gross profit, income before income tax expense, net income, and income tax expense

If a company assumes that it's inventory costs flow out in the opposite order from which the goods were purchased, it uses _____ to value its inventory

LIFO

When costs to purchase inventory are rising, using LIFO leads to reporting a _____ than FIFO

Lower value for inventory on the balance sheet

The costs of carrying inventory include the costs of ____.

Spoilage, shortage, theft, and obsolescence

T/F: FIFO perpetual and FIFO periodic inventory methods result in the same amount of Cost of Goods Sold

True

T/F: the Inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP

True

Dumb Waiters, Inc. has 2 units in beginning inventory with a cost of $10 each. It purchases 3 more at $12 each. It sold 2 units. Using the ________ cost inventory method, cost of goods sold equals $22.40

Weighted average

FIFO, an inventory costing method, actually describes how to calculate the cost of _____.

goods sold

Who decides which of the many inventory accounting methods a company should use?

the company's management

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

$10,000/(($800+$1,200)/2)= 10

Delta Diamonds had 5 diamonds available for sale this year; 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using periodic weighted average cost, its inventory after the December 24 sale is:

($500+(2 x $550)+(2 x $600))/(1 +2+2)= $560, $560 x 4= $2,240

Widget Company started the month with 10 gadgets in its inventory that cost $5 each. During the month, Widget bought 50 more gadgets that cost $6 each. During the month it sold 52 gadgets, using FIFO perpetual inventory. Cost of goods sold equals:

(10 x $5)+(42 x $6)= $302

Delta Diamonds had 5 diamonds available for sale this year; 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds. Using FIFO, it's inventory at December 31 is:

(2 x $550)+(2 x $600)= $2,300

Lux Company started the month with 20 lamps in its beginning inventory that cost $30 each. During the month, Lux purchased 80 additional lamps for $31 each. At the end of the month, Lux counted its inventory and found that 25 lamps remained unsold. If Lux uses periodic weighted average cost, its cost of goods sold for the month is:

(20 x $30)+(80 x $31)/100= $2,310

What inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO (first in first out) and LIFO (last in first out)

Beginning inventory consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using last-in, first-out, cost of goods sold equals:

(3 x $11)= $33

On May 1, beginning inventory consists of 10 items at a cost of $10 each. On May 3, 10 items are purchased at $12 each. On May 8, 12 items are sold. On May 15, 10 items are purchased at $14 each. Using perpetual LIFO, ending inventory at May 31 equals:

(8 x $10)+(10 x $14)= $220

Beta company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Betas weighted average cost is:

(80 x $12)+(20 x $12.50)/100= $12.10

Assuming sales remain unchanged, if cost of goods sold increases then gross profit ______.

Decreases

When costs are rising, ______ produces a larger inventory balance and smaller cost of goods sold, which makes the company look more profitable

FIFO

Which inventory costing method uses the oldest cost for Cost of Goods Sold on the income statement and the newest cost for inventory on the balance sheet?

FIFO

Which financial statements are needed to calculate the inventory turnover ratio?

Income statement and balance sheet

The assumption that a company makes about its inventory cost flow can affect cost of goods sold on its _____ and inventory on its _____.

Income statement; balance sheet

As Inventory quality increases, it's cost usually ____.

Increases

What statement concerning inventory is correct?

Inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date

Applying the lower of cost or market rule results in inventory being reported at the _____.

Market value if lower than cost

______ Inventory consists of products acquired in a finished condition, ready for sale without further processing

Merchandise