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70 True/False questions

  1. Freight charges add to what?.. while purchase discounts and purchase returns reduce the cost of what? what do you debit and credit in each case?inventory

    Freight charge Debit inventory credit cash
    return debit cash, credit inventory

          

  2. Freight-outCost to transport inventory to the company, which is included as part of the inventory cost

          

  3. The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting.

    True
    False
    cost of goods sold divided by average inventory. The ratio
    shows the number of times the firm sells its average inventory balance during a reporting period.

          

  4. We use the term capitalize to describe recording an expenditure as an expense.

    True
    False
    False, Accumulated Depreciation is a contra-asset account; it reduces an asset account.

          

  5. how do you calculate ending inventory?price per unit times number of units sold

          

  6. A patent is an exclusive right to a published work such as a song, film, or painting.

    True
    False
    False, A patent is an exclusive right to manufacture a product or to use a process. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.

          

  7. Generally, a lower gross profit ratio reflects positively on a company's ability to manage its inventory.

    True
    False
    False, A higher ratio is generally a stronger signal about the company's successful management of inventory.

          

  8. Accumulated Depreciation is a liability account that is increased by credits.

    True
    False
    True, We use the term capitalize to describe recording an expenditure as an asset.

          

  9. The inventory turnover ratio equals... what does it mean?cost of goods sold divided by average inventory. The ratio
    shows the number of times the firm sells its average inventory balance during a reporting period.

          

  10. Gross profit ratioThe difference between sales revenue and COGS

          

  11. Straight-line produces a lower net income than accelerated methods in the earlier years of an asset's life.

    True
    False
    False, Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life.

          

  12. What better approximates the current cost of inventory in the balance sheet? Fifo or Lifo why?FIFO, Since FIFO assumes the first purchases sell first,
    the amount it reports for ending inventory better approximates it.

          

  13. Average days in inventoryProfitability from normal operations that equals gross profit less operating expenses

          

  14. The use of the lower-of-cost-or-market method to report inventory is an example of conservatism in financial reporting.

    True
    False
    Method where companies report inventory in the balance sheet at the lower of cost or market value, where market value equals replacement cost

          

  15. how do you calculate cost of goods sold?price per unit times number of units sold

          

  16. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.

    True
    False
    False, A patent is an exclusive right to manufacture a product or to use a process. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.

          

  17. Cost of goods soldInventory items for which the manufacturing process is complete

          

  18. At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory system.

    True
    False
    False, The debit is to the Inventory account.

          

  19. The purposes of the period-end adjustment are to(1) update the balance of inventory for its ending amount, (2) record
    cost of goods sold, and (3) close the temporary purchases accounts to zero.

          

  20. Operating income equals..Profitability from normal operations that equals gross profit less operating expenses

          

  21. Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold.

    True
    False
    Total cost/Total number of units

          

  22. in the multi-step income statement, how do you calculate everything including gross profit..?First find Cost of goods sold which is " the cost of the units sold + your lifo/fifo/weighted average adjustment + write down to market value if needed" . Then do net sales minus this amount to find Gross Profit.

          

  23. Inventory Turnover RatioItems a company intends for sale to customers

          

  24. When you have a discount for terms 2/10 n/30, how do you record this when you pay in the discounted date?gross profit divided by net sales. The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. The higher the ratio, the higher is the "markup" a
    company is able to achieve on its inventories

          

  25. Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory.

    True
    False
    False, A higher ratio is generally a stronger signal about the company's successful management of inventory.

          

  26. We record a loss if we sell an asset for less than book value.

    True
    False
    True

          

  27. Work-in-progressDifference between all revenues and all expenses for the period

          

  28. Under the perpetual system, two
    transactions are recorded...what are they?
    increasing an asset account (cash or accounts receivable) and increasing sales revenue.

          

  29. Specific identification methodInventory costing method that matches or identifies each unit of inventory with its actual cost

          

  30. You record Costs of goods sold only when...?an item is sold and when you use a perpetual inventory system.

          

  31. Lower-of-cost-or-market (LCM) methodMethod where companies report inventory in the balance sheet at the lower of cost or market value, where market value equals replacement cost

          

  32. In an activity-based depreciation method, we allocate an asset's cost based on its use.

    True
    False
    True

          

  33. We allocate natural resources to expense through a process known as "depletion."

    True
    False
    True

          

  34. The entry to adjust from cost to market for inventory write
    downs includes a...
    debit to cost of goods sold and a credit to inventory

          

  35. We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the acquisition of another company.

    True
    False
    an item is sold and when you use a perpetual inventory system.

          

  36. Sales revenue minus cost of goods sold is referred to as operating income.

    True
    False
    True

          

  37. Raw materialsComponents that will become part of the finished product but have not yet been used in production

          

  38. Periodic inventory systemInventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand

          

  39. Income before income taxesDifference between all revenues and all expenses for the period

          

  40. Net incomeCost of freight on shipments to customers, which is included in the income statement as either a part of cost of goods sold or as a selling expense

          

  41. Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the Purchases account, which is a temporary account closed to cost of goods sold at the end of the period.

    True
    False
    increasing an asset account (cash or accounts receivable) and increasing sales revenue.

          

  42. Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold.

    True
    False
    False

          

  43. Freight-inCost of freight on shipments to customers, which is included in the income statement as either a part of cost of goods sold or as a selling expense

          

  44. First-in, first-out method (FIFO)Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out)

          

  45. The gross profit ratio equals...what does it mean?gross profit divided by net sales. The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. The higher the ratio, the higher is the "markup" a
    company is able to achieve on its inventories

          

  46. how do you calculate the weighted average?Price per unit times number of units left

          

  47. What better approximates the current cost of inventory in the income statement? Fifo or Lifo why?the lower of cost or market method, that is, at cost (specific identification, FIFO, LIFO, or weighted average cost) or market value (replacement cost), whichever is lower. When market value falls below cost, we adjust inventory down from cost to market value.

          

  48. InventoryDifference between all revenues and all expenses for the period

          

  49. Multiple-step income statementOperating income plus nonoperating revenues less nonoperating expenses

          

  50. Gross profitMeasure the amount by which the sale price of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales

          

  51. Weighted-average cost methodInventory costing method that matches or identifies each unit of inventory with its actual cost

          

  52. When a change in estimate is required, the company changes depreciation in prior, current and future years.

    True
    False
    False, Companies must report inventory at the lower of cost or market value.

          

  53. We report inventory using what method?Inventory system that maintains a continual record of inventory purchased and sold

          

  54. Operating incomeDifference between all revenues and all expenses for the period

          

  55. Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in later years.

    True
    False
    False, Declining-balance depreciation will be higher than straight-line depreciation in earlier years, but lower in later years.

          

  56. LIFO conformity ruleIRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

          

  57. Perpetual inventory systemInventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand

          

  58. FIFO results in what when inventory costs are rising? why?the highest reported amount for ending inventory, the oldest (or first) items are sold first and these are the lower cost items, leaving the higher cost items to be reported in ending inventory.

    highest reported amount of net income, the oldest (or first) items are sold first and these are the lower cost items. Reporting cost of goods sold based on the lower cost items results in net income being higher

          

  59. Finished goodsInventory items for which the manufacturing process is complete

          

  60. When the value of inventory falls below its cost, companies have the option of recording the inventory at cost or the lower market value.

    True
    False
    False, When a change in estimate is required, the company changes depreciation in current and future years, but not in prior periods.

          

  61. Residual value, also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life.

    True
    False
    True

          

  62. Land improvements are recorded separately from the land itself because, unlike land, these assets are subject to depreciation.

    True
    False
    True

          

  63. You should pay attention to what when reading a problem that says an item is being sold or payed..whether it says sold on account or sold in cash/ paid on account or paid in cash.

          

  64. LIFO results in what when inventory costs are rising? why?generally results in lower income taxes payable when inventory costs are increasing because net income in this case is lower (than if FIFO were used).The LIFO conformity rule requires a company that uses LIFO for tax reporting to also use LIFO for financial reporting.

          

  65. LIFO adjustmentAn adjustment used to convert a company's own inventory records maintained on a FIFO basis to LIFO basis for preparing financial statements

          

  66. Cost of goods sold is an expense reported in the income statement and represents the cost of inventory sold during the period.

    True
    False
    generally results in lower income taxes payable when inventory costs are increasing because net income in this case is lower (than if FIFO were used).The LIFO conformity rule requires a company that uses LIFO for tax reporting to also use LIFO for financial reporting.

          

  67. Under the periodic system, the sale of inventory is recorded by..

    Under the perpetual system, two
    transactions are recorded.
    increasing an asset account (cash or accounts receivable) and increasing sales revenue.

          

  68. Last-in, first-out method (LIFO)Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out)

          

  69. Income before income taxes equals..operating income plus nonoperating revenues and minus
    nonoperating expenses.

          

  70. Replacement costDifference between all revenues and all expenses for the period