Question

Fill in the blanks using the dropdown list.

1.

When the perpetual inventory method is being used, the accountant debits __________ __________ and credits Accounts Payable (or Cash) when goods are purchased and debits Cost of Goods Sold and credits __________ __________ when gods are sold, along with the proper sales entry.

2.

When prices are rising, LIFO inventory is __________ (higher or lower) than FIFO inventory at the end of the year. This will cause the cost of goods sold under LIFO to be __________ (higher or lower) than under FIFO, and accordingly the net income will be __________ (higher or lower) under LIFO.

3.

Name two recognized methods of estimating the cost of ending inventory.

4.

Assuming periodic inventory procedure, what effect would an understatement of ending inventory have on the different items on the financial statements?

Balance Sheet

Income Statement

Current Assets

Cost of Goods Sold

Total Assets

Gross Margin

Retained Earnings

Net Income

Total Liabilities and Retained Earnings

Fill in the blank options questions 1-3:

0.66:1

cost of goods available for sale

estimated cost of goods sold

FIFO

first-in, first-out

gross margin method

higher

historical

last-in, first-out

less

LIFO

Lower

Merchandise Inventory

net sales

replacement

retail inventory method

Fill in the blank options questions 4:

Overstated

understated

Answer 1

1. When the perpetual inventory method is being used, the accountant debits ___Merchandise Inventory ____ and credits Accounts Payable (or Cash) when goods are purchased and debits Cost of Goods Sold and credits ____Merchandise Inventory ____ when gods are sold, along with the proper sales entry.

2. When prices are rising, LIFO inventory is ___lower____ than FIFO inventory at the end of the year. This will cause the cost of goods sold under LIFO to be ___higher__ than under FIFO, and accordingly the net income will be ___lower__ under LIFO.

3. Two recognized methods of estimating the cost of ending inventory:
1. Gross Margin Method
2. Retail Inventory Method

4. Assuming periodic inventory procedure, the following effect would an understatement of ending inventory have on the different items on the financial statements:

Balance Sheet	Income Statement
Current Assets	Understated	Cost of Goods Sold	Overstated
Total Assets	Understated	Gross Margin	Understated
Retained Earnings	Understated	Net Income	Understated
Total Liabilities and Retained Earnings	Overstated