Smartbook Chapter 7 PDF

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1. Using a perpetual inventory system, the journal entry to record a sale on account

will include a ______. (Check all that apply.) ● debit to Accounts Receivable ● debit to Cost of Goods Sold ● credit to Inventory ● a credit to Sales Revenue

2. After each sale of merchandise to a customer, both Inventory and Cost of Goods

Sold are kept up-to-date in a perpetual system. 3. The journal entry to record the payment of cash to a trucker for a purchase of

merchandise received will cause: one asset to increase and another asset to decrease 4. FIFO, an inventory costing method, actually describes how to calculate the cost

of goods sold. 5. In a periodic system, for Cost of Goods Sold to be updated, which of the

following must occur? (Check all that apply.) ● Compute Cost of Goods Sold sold by subtracting Ending Inventory from Goods Available for Sale. ● Take a physical count of inventory. 6. Goods available for sale can be sold and then become cost of goods sold on

the income statement. Reason: Goods available for sale that have not yet been sold are reported as inventory, an asset on the statement of financial position. Cost of goods sold is an expense on the income statement. 7. ABC Corp. sells a product for $1,000 cash that cost $600. The journal entry for

this transaction using a perpetual inventory system includes a debit to Cash of $1,000 and a credit to Sales revenue of $1,000; a debit to Cost of goods sold of $600 and a credit to Inventory of $600. 8. Under the perpetual inventory system, the inventory account is updated every

time inventory is bought, sold, or returned. 9. Which inventory system requires that the Inventory account be updated when

merchandise is purchased? Perpetual system Periodic Reason: Purchases are recorded as increases in the purchases account.

10. In a perpetual inventory system, which of the following statements are true?

● The seller should record freight-out as a selling expense. ● The purchaser should record freight-in as an asset, Inventory.

11. Under the Periodic inventory system, inventory records are updated only at the

end of the accounting period. (Enter one word per blank.) 12. The journal entry to record the return of merchandise previously purchased on

account was recorded by debiting Inventory and crediting Accounts payable. As a result of this entry, ______. ● liabilities will be overstated ● assets will be overstated

13. Bijoux Company has sales of $40,000, beginning inventory of $5,000, purchases

of $25,000, and ending inventory of $7,000. The goods available for sale for the period equals $30,000. Reason: Goods available for sale equals $30,000 (= beginning inventory of $5,000 plus purchases of $25,000). 14. True or false: GAAP requires that a business must use an inventory accounting

method that is the same as the physical flow of goods in and out of the business. False 15. Which inventory system requires purchases of merchandise to be recorded in the

inventory account instead of the purchases account? The perpetual inventory system 16. In a perpetual inventory system, Inventory is initially recorded at cost. 17. Specific identification is an inventory method that individually identifies and

records the cost of each item as cost of goods sold 18. The journal entry to record taking a discount when paying for goods previously

purchased on account using the gross method includes a ______. ● credit to Inventory for the discount amount ● debit to Accounts Payable for the original cost ● credit to Cash for the amount paid

19. Berkley Company had Beginning inventory of $4,000 and Purchases of $20,000.

If half of its inventory was sold, Berkley's goods available for sale will be split between cost of goods sold and ending inventory 20. 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 21. Which of these inventory accounting methods are acceptable under Canadian

GAAP? ● Specific identification ● Weighted average ● FIFO

22. Which inventory system requires that the Inventory account be updated when

merchandise is purchased? 23. If a new company calculates the average cost of its inventory by adding together

the total cost of all purchases and then dividing it by the number of units purchased during the period, it is using the weighted average cost method. (Enter one word per blank.) 24. Assuming sales remain unchanged, if Cost of Goods Sold increases then Gross

Profit decreases 25. Which inventory costing method assumes that the inventory's cost flow out in the

same order the goods are received? FIFO 26. Assuming rising inventory prices, put these inventory methods in order (from

highest to lowest) based on ending inventory values. 1. FIFO 2. Weighted average. 27. The weighted average cost method uses the Average cost for cost of goods sold

on the income statement and the Average cost for inventory on the statement of financial position. 28. Who decides which of the many inventory accounting method a company should

use? The company's management

29. Which of the following income statement line items are affected by the inventory

method chosen? (Select all that apply.) ● Income Tax Expense ● Gross Profit ● Income before Income Tax Expense ● Income from Operations ● Net Income

30. Which of these might cause the value of inventory to fall below its original cost?

(Check all that apply.) ● Net realizable value falling below cost ● Damage ● Obsolescence from going out of style

31. The journal entry to record a write-down of inventory from cost to its lower net

realizable value (NRV) includes a: (Check all that apply.) ● credit to Inventory ● debit to Cost of Goods Sold

32. When costs to purchase inventory are rising, using average cost leads to

reporting higher cost of goods sold and lower net income than FIFO. 33. Which of the following statements are true? (Check all that apply.)

● Using a different inventory accounting method leads to reporting a different amount for cost of goods sold. ● Managers can choose the method of accounting for inventory cost that best fits their business.

34. A lower of cost and net realizable value (NRV) write-down: (Check all that apply.)

● recorded incorrectly is one of the most common types of financial statement misstatements. ● is viewed by analysts as a negative sign because it may indicate a problem with the company's inventory management.

35. If an adjusting entry at the end of the accounting period debited Cost of goods

sold and credited Inventory, then the net realizable value of inventory fell below cost. 36. d

37. Which financial statements will be misstated if the 2016 ending inventory balance

is understated? (Check all that apply.) ● 2017 income statement ● 2016 income statement ● 2016 statement of financial position

38. Lower of cost and net realizable value (LCNRV) should be used because it is

better to: be prudent (conservative) and not overstate assets. 39. True or false: An error in ending inventory in Year 1 will cause ending inventory in

Year 2 to be misstated as well. False 40. What may cause inventory turnover ratios to vary significantly between

companies in the same industry? (Check all that apply.) ● Some companies may sell fewer higher-cost goods. ● Some companies may sell more lower-cost goods.

41. A company had beginning inventory of 3 units that cost $5 each. During the

month, 17 units were purchased for $6 each. The company sold 15 units during the month and had 5 remaining in ending inventory. If the company uses FIFO instead of weighted average cost to calculate cost of goods sold, then cost of goods sold will be lower using FIFO, leading to higher gross profit and higher income taxes.

42. Barry Bees, 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 Bee's inventory turnover ratio equals 10 times. Reason: Inventory turnover ratio = Cost of Goods Sold/Average Inventory = 10 times (= $10,000/ (($800 + $1,200)/2)) 43. Which of the following would be found in a company that has an effective system

of internal controls regarding inventory? (Check all that apply.) ● Limit the access to inventory to authorized personnel only. ● One employee is responsible for actual physical control over inventory while a different employee enters inventory information into the computer. ● Inventory is stored in a protected area.

44. The inventory turnover ratio directly measures the times per period the

average inventory balance is sold. 45. Which of the following 2018 financial statement line items will be affected if the

2018 ending inventory is overstated? (Check all that apply.) ● Current assets will be overstated. ● Net income will be overstated. ● Cost of goods sold will be understated.

46. Ending inventory errors in 2018 will affect the 2019 goods available for sale

but will not affect the 2019 ending inventory. 47. If Barry Bees, Inc.'s average days to sell equals 73 days based on a 365-day

year, then its inventory turnover ratio equals 5 times. (365/73) 48. Which company is most likely to have a higher inventory turnover than its

competitors within the same industry? A company with lower-priced goods and lower gross profit 49. A decrease in Inventory will be added back to net income when determining net

cash flow provided by operating activities on the statement of cash flows. 50. 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. 51. Which of the following may occur with a higher inventory turnover ratio?

● Reduction in inventory storage costs ● Reduction in obsolescence 52. Assuming the use of a 365-day year, Barry Bees, Inc.'s Cost of Goods Sold

equals $10,000. Its Beginning Inventory was $800, and its Ending Inventory was $1,200. Barry Bee's average days to sell inventory equals 36.5 days 53. An increase in Inventory will be subtracted from net income when determining

net cash flow provided by operating activities. 54. D 55. D 56. D 57. D 58. D 59....