Chapter 7

Question 1

Journal Entry to Buy Inventory:

Answer 1

dr. Inventory

cr. Cash or Accounts Payable

Question 2

Journal Entry to Sell Inventory:

Answer 2

dr. Cash or Accounts Receivable
cr. Sales Revenue

and

dr. Cost of Goods Sold
cr. Inventory

Question 3

Inventory Management Decisions

Answer 3

(1) Maintain a sufficient quantity of inventory to meet customers needs
(2) Ensure quality meets customers expectations and company standards
(3) Minimize the costs of acquiring and carrying the inventory

Question 4

Purchase finished goods from suppliers for resale to customers.

Answer 4

Merchandising Companies

Question 5

Purchase raw materials from suppliers and produce and sell finished goods to customers.

Answer 5

Manufacturing Companies

Question 6

Types of inventory reported on balance sheet of manufacturing companies:

Answer 6

(1) Raw materials
(2) Work in process
(3) Finished goods

Question 7

Merchandising companies ______ have to distinguish between raw materials, work in process, and finished goods. They report _____ inventory number on their balance sheet labeled __________.

Answer 7

(1) Do not
(2) One
(3) Merchandise Inventory

Question 8

Materials used to make the product and waiting to be processed.

Answer 8

Raw Materials

Question 9

Partially completed products but will require further work to be saleable to customers.

Answer 9

Work in Process

Question 10

Consists of units of product that have been completed, but not yet sold to customers.

Answer 10

Finished Goods

Question 11

Reported on Balance Sheet

Answer 11

Inventory

Question 12

Reported on Income Statement

Answer 12

Cost of Goods Sold

Question 13

Periodic Equation

Answer 13

Beginning Inventory + Purchases - Ending Inventory = COGS

Question 14

Perpetual Equation:

Answer 14

Beginning Inventory + Purchases - COGS = Ending Inventory

Question 15

Beginning Inventory + Purchases =

Answer 15

Cost of Goods Sold

Question 16

Inventory Costing Methods:

Answer 16

(1) Specific Identification
(2) FIFO (First in, first out)
(3) LIFO (Last in, first out)
(4) Weighted Average

Question 17

Effects of Increasing Costs on the Financial Statements (FIFO)

Answer 17

Inventory (Balance Sheet) - higher
COGS (Income Statement) - lower
** Results in higher gross profit

Question 18

Effects of Increasing Costs on the Financial Statements (LIFO)

Answer 18

Inventory (Balance Sheet) - lower

COGS (Income Statement) - higher

Question 19

Effects of Decreasing Costs on the Financial Statements (FIFO)

Answer 19

Inventory (Balance Sheet) -lower

COGS (Income Statement) - higher

Question 20

Effects of Decreasing Costs on the Financial Statements (LIFO)

Answer 20

Inventory (Balance Sheet) - higher
COGS (Income Statement) - lower
** Results in higher gross profit

Question 21

Advantages of Weighted Average

Answer 21

Smooths out price changes

Question 22

Advantages of First-In, First-Out

Answer 22

Ending inventory approximates current replacement cost

Question 23

Advantages of Last-In, First-Out

Answer 23

Better matches current costs in cost of goods sold with revenues.

Question 24

When costs are rising, FIFO produces a _______ Inventory value (making the balance sheet appear to be stronger) and a _______ Cost of Goods Sold (resulting in a higher gross profit, which makes the company look more profitable). When costs are falling, these effects are reversed.

Answer 24

(1) Higher

(2) Lower

Question 25

Inventory Turnover Ratio

Answer 25

COGS / (Average Inventory)

Question 26

Days to Sell

Answer 26

365 / (Inventory Turnover Ratio)

Question 27

The number of times inventory turns over during the period (higher = faster).

Answer 27

Inventory Turnover Ratio

Question 28

Average number of days from purchase to sale (higher = longer time to sell)

Answer 28

Days to Sell

Question 29

For merchandisers, inventory turnover refers to:

Answer 29

Buying and selling goods

Question 30

For manufacturers, inventory turnover refers to:

Answer 30

Producing inventory and delivering it to customers