CH 6 Inventory and Costs of Goods Sold

Question 1

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

Answer 1

inventory

Question 2

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

Answer 2

manufacturers, manufacturing, or manufacturer

Question 3

_____________ companies produce the inventories they sell rather than buying them as a finished product from supplies

Answer 3

manufacturing

Question 4

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

Answer 4

merchandising, merchant, retail, wholesale, or merchandise

Question 5

_____________ companies, such as Best Buy, don’t manufacture computers or their components. Instead, Best Buy purchases finished computers from manufacturers, and then these companies are sold to customers.

Answer 5

Merchandising

Question 6

When inventory is sold, the cost of inventory is recognized as a _______
in the income statement.

Answer 6

expense, COGS, or cost of goods sold

Question 7

Net sales revenue minus cost of goods sold is

Answer 7

gross profit.

Question 8

The definition of inventory:

Answer 8

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

Question 9

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

Answer 9

Manufacturers

Question 10

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

Answer 10

merchandising

Question 11

Inventory not yet sold is reported as _______
in the balance sheet.

Answer 11

asset

Question 12

Gross Profit is…

Answer 12

Net Sales Revenue minus Cost of Goods Sold.

Question 13

The specific identification method:

Answer 13

matches each unit of inventory with its actual cost.

Question 14

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

Answer 14

inventory or inventories

Question 15

Companies that produce the inventory they sell are referred to as

Answer 15

manufacturers

Question 16

The FIFO method assumes that units sold are the ____ units

Answer 16

first, earliest, or oldest.

Question 17

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

Answer 17

merchandising

Question 18

The LIFO inventory method assumes that the first units sold are

Answer 18

the most recent units purchased.

Question 19

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

Answer 19

specific identification.

Question 20

The ________ identification method is the method you might think of as the most logical. It matches–or identifies– each unit of inventory with its actual cost.

Question 21

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

Answer 21

newest, recent, last, latest, or new

Question 22

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

Answer 22

the oldest units in inventory.

Question 23

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

Answer 23

a mixture of all the goods available for sale.

Question 24

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

Answer 24

FIFO

Question 25

A periodic inventory system measures cost of goods sold by

Answer 25

counting inventory at the end of the period.

Question 26

The specific identification method:

Answer 26

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

Question 27

Using the perpetual inventory system, the purchase of inventory on account results in a(n):

Answer 27

increase in assets increase in liabilities

Question 28

Perpetual inventory system

Answer 28

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

Question 29

Periodic inventory system

Answer 29

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

Question 30

When the perpetual inventory system is used, what are the financial statement effects of a sale of inventory on account?

Answer 30

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

Question 31

Timber Corp., which uses the perpetual inventory system, purchases on account 500 units of inventory at $5 each. Timber will report a(n):

Answer 31

increase in Accounts Payable of $2,500 increase in Inventory of $2,500

Question 32

The inventory turnover ratio directly measures Blank______.

Answer 32

the times per period the average inventory balance is sold

Question 33

When the perpetual inventory system is used, what are the financial statement effects of a sale of inventory on account? (Assume that the sales price is higher than the cost of inventory.)

Answer 33

net income increases stockholders' equity increases total assets increase

Question 34

What does the gross profit ratio indicate in a company's financial analysis?

Answer 34

The percentage by which the sale of inventory exceeds its cost per dollar of sales.

Question 35

Freight-in on inventory purchases is typically recognized as

Answer 35

part of the cost of purchasing inventory.

Question 36

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

Answer 36

Inventory , Turnover

Question 37

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

Answer 37

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

Question 38

Which of the following is a correct interpretation of the information provided by the gross profit ratio?

Answer 38

It measures the amount by which the sale of inventory exceeds its cost per dollar of sales.

Question 39

Freight-in is

Answer 39

included as a cost of inventory.

Question 40

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:

Answer 40

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

Question 41

Under a perpetual inventory system, the financial statement effects of the return of goods previously purchased on account include a(n):

Answer 41

decrease in total assets decrease in total liabilities

Question 42

The _____ method of valuing inventory was developed to avoid reporting inventory at an amount that is ______ than the benefits it can provide.

Answer 42

lower of cost and net realizable value; greater

Question 43

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

Answer 43

net realizable value

Question 44

Under a perpetual inventory system, the return of goods previously purchased on account results in a(n):

Answer 44

decrease in Inventory decrease in Accounts Payable

Question 45

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

Answer 45

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

Question 46

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

Answer 46

realizable value