MGMT 20000 Chapter 6 Review

The definition of inventory includes which of the following items? A. Items currently in production for future sale B. Items held for use or disposal C. Items held for resale D. Items used currently in the production of goods to be sold

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

Inventory is classified as A. a revenue. B. a current asset. C. a current liability. D. a noncurrent asset.

B. a current asset.

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

A. LIFO reserve

In a perpetual inventory system, purchase discounts and purchase returns A. are recorded in a separate contra purchases account. B. are recorded as an expense. C. directly reduce the Inventory account balance.

C. directly reduce the Inventory account balance.

Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be A. the related inventory account B. a separate freight-in account. C. an operating expense D. cost of goods sold

B. a separate freight-in account.

Freight-in costs are debited to Inventory in this inventory system: A. both perpetual and periodic B. periodic only C. perpetual only

C. perpetual only

If a company uses the perpetual inventory system, how many entries are made when a sale occurs? A. One B. Three C. Two D. Zero

C. Two

When prices increase, the _____ inventory method provides the best matching of revenue and expenses.

LIFO

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

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

outdated

A multiple-step income statement reports multiple levels of _____.

income

Where is inventory reported in the financial statements? A. Balance sheet as a current asset B. Statement of cash flows as an investing activity C. Income statement as revenue D. Balance sheet as a noncurrent asset

A. Balance sheet as a current asset

The _____ method of valuing inventory was developed to avoid reporting inventory at an amount that is _____ than the benefits it can provide. A. lower of cost and net realizable value; greater B. lower of cost and net realizable value; smaller C. cost-benefit; smaller D. cost-benefit; greater E. lower of cost and sales revenue; smaller F. lower of cost and sales revenue; greater

A. lower of cost and net realizable value; greater

Under the periodic inventory system, purchase returns and purchase discounts accounts represent A. revenue accounts. B. contra purchases accounts. C. expense accounts. D. contra revenue accounts.

B. contra purchases accounts.

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following? A. Debit Sales Revenue B. Debit Accounts Payable C. Debit Purchases D. Debit Inventory

D. Debit Inventory

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

D. FIFO

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. A. current B. classified C. single-step D. multiple-step

D. multiple-step

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the _____ _____.

LIFO reserve

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

Perpetual inventory system: 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.

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

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

inventory

In a perpetual inventory system, when inventory is purchased, the _____ account is debited, whereas in a periodic system, the _____ account is debited.

inventory; purchases

Companies that produce the inventory they sell are referred to as _____. (Enter one word per blank)

manufacturing

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a _____ inventory system.

perpetual

A _____ inventory system updates the inventory account each time a sale or purchase is made, whereas a _____ inventory system calculates cost of goods sold and ending inventory at the end of the reporting period.

perpetual; periodic

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

The lower of cost and net realizable value method was developed to A. provide an alternative to the FIFO, LIFO, and weighted-average methods. B. prevent the company from selling the inventory below its original cost. C. avoid reporting inventory at an amount that exceeds the benefits it provides.

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

When a sale occurs under the periodic inventory system, we record: A. both the sale and the related cost of goods sold B. only the cost of goods sold, but not the sale C. only the sale, but not the related cost of goods sold

C. only the sale, but not the related cost of goods sold

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods. A. Inventory B. Cost of Goods Sold C. Purchases D. Sales Revenue

A. Inventory B. Cost of Goods Sold

Which of the following methods are available for costing inventory? (Select all that apply.) A. LIFO B. Simple-average C. NIFO D. Weighted-average E. Specific identification F. FIFO

A. LIFO D. Weighted-average E. Specific identification F. FIFO

Which of the following represent reasons why managers closely monitor inventory levels? A. To ensure that sufficient units are available. B. To increase the average days in inventory. C. To minimize costs of inventory write-downs due to obsolete inventory.

A. To ensure that sufficient units are available. C. 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? A. assets increase by the sales price of the inventory B. assets decrease by the cost of the inventory C. assets increase by the cost of the inventory D. assets decrease by the sales price of the inventory

A. assets increase by the sales price of the inventory B. assets decrease by the cost of the inventory

Meller purchases inventory on account. As a results, Meller's A. assets will increase. B. stockholders' equity will decrease. C. liabilities will decrease. D. income will decrease.

A. assets will increase.

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

A. counting inventory at the end of the period.

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to: A. increase an asset and increase revenue B. decrease an asset and decrease revenue C. decrease an asset and increase an expense D. increase an asset and decrease an expense

A. increase an asset and increase revenue C. decrease an asset and increase an expense

Purchasing inventory on account: A. increases assets B. increases liabilities C. increases equity D. decreases assets E. decreases equity

A. increases assets B. increases liabilities

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

A. 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: A. inventory B. revenue C. operating expenses D. gains and losses

A. inventory

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: A. overstated net income B. the financial statement will be correct C. overstated assets, retained earnings and net income D. understated assets, retained earnings, and net income

A. overstated net income

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) A. total assets increase B. stockholders' equity increases C. net income increases D. stockholders' equity decreases E. total assets decrease

A. total assets increase B. stockholders' equity increases C. net income increases

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: A. understated assets, retained earnings, and net income B. understated assets; overstated retained earnings and net income C. the financial statements are correct

A. understated assets, retained earnings, and net income

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption? A. Weighted-average B. FIFO C. LIFO

B. FIFO

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. A. True B. False

B. False

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to: A. Raw Materials B. Inventory C. Cost of Goods Sold D. Purchases

B. Inventory

In a periodic inventory system, purchase returns A. are recorded as an expense. B. are recorded in a separate contra purchases account. C. directly reduce the Inventory account balance.

B. are recorded in a separate contra purchases account.

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.) A. current assets. B. cost of goods sold. C. inventory. D. liabilities.

B. cost of goods sold. C. inventory.

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

B. included in Gerald's inventory.

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

B. paid by the supplier.

Period-end adjustments are necessary for the: A. perpetual inventory system B. periodic inventory system C. the perpetual and the periodic inventory system

B. periodic inventory system

In a periodic inventory system, freight-in costs are A. expensed in the period incurred. B. recognized in a temporary freight-in account. C. recorded directly in the inventory account.

B. recognized in a temporary freight-in account.

FOB shipping point means title to the goods passes A. when they arrive at the destination. B. when they are shipped.

B. when they are shipped.

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

B. when they arrive at the destination.

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

C. FIFO

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

C. LIFO

What type of company purchases raw materials and makes goods to sell? A. Wholesalers B. Retailers C. Manufacturers

C. Manufacturers

Which of the following methods are not used for inventory costing? (Select all that apply.) A. Weighted-average B. Specific identification C. Simple-average D. LIFO E. FIFO F. NIFO

C. Simple-average F. NIFO

In a perpetual inventory system, when a company sells inventory on account, how many entries are required? A. Three B. One C. Two D. Zero

C. Two

In a perpetual inventory system, freight costs on purchases are A. recorded in a separate Freight-in account. B. expensed during the period incurred. C. added to the inventory account.

C. added to the inventory account.

Match the inventory cost flow assumptions on the left with the scenario on the right. FIFO LIFO __________________________________________ Most closely approximates the actual physical flow of inventory Provides better matching of current revenues with current inventory cost

FIFO: Most closely approximates the actual physical flow of inventory LIFO: Provides better matching of current revenues with current inventory cost

Match each scenario with the type of inventory system. Perpetual inventory system Periodic inventory system _________________________________ Neumann Company can determine the cost of inventory still on hand by referring to the inventory account. Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

Perpetual inventory system: Neumann Company can determine the cost of inventory still on hand by referring to the inventory account. Periodic inventory system: Shelly Company must first take a physical inventory to determine the cost of inventory still on hand.

Match the inventory system with the account utilized to record a purchase of inventory. Perpetual Periodic __________________________________________ "Purchases" "Inventory"

Perpetual: "Inventory" Periodic: "Purchases"