Chapter 6 Review Sheet

What purposes does the period-end adjustment have?

1) Adjusts the balance of inventory to its proper ending balance 2) Records the cost of goods sold for the period, to match inventory costs with the related sales revenue 3) Closes (or zeros out) the temporary purchases accounts (Purchases, Freight -In, Purchase Discounts & Purchase Returns)

Explain the benefits of each method compared to the others.

1) FIFO results in higher inventory in balance sheet & higher gross profit in income statement 2) LIFO reports lowest inventory & gross profit 3) FIFO- balance-sheet approach because the amount it reports for ending inventory better approximates current cost of inventory 4) LIFO- income statement approach more realistically matches current costs of inventory needed to produce current revenues

For the year, Simmons Incorporated reports net sales of $100,000, cost of goods sold of $80,000, and an average inventory balance of $40,000. What is Simmons' gross profit ratio? A. 20% B. 25% C. 40% D. 50%

A. 20%

Which of the following levels of profitability in a multiple-step income statement represents revenues from the sale of inventory less the cost of that inventory? A. Gross Profit B. Operating Income C. Income before Income Taxes D. Net Income

A. Gross Profit

Which equation represents the gross profit in the multi-step income statement? A. Net Sales - Cost of Goods Sold B. Gross Profit - Operating Expenses C. Operating Income + Non operating Revenues - Non operating Expenses D. Revenue - Expenses

A. Net Sales - Cost of Goods Sold

What does the inventory turnover ratio measure? A. shows the number of times the firm sells its average inventory balance during a reporting period B. the approximate number of days the average inventory is held C. the amount by which the sale price of inventory exceeds its cost per dollar of sales

A. shows the number of times the firm sells it average inventory balance during a reporting period

How does the seller record a sale on account for $52,500?

Accounts Receivable 52,500 Sales Revenue 52,500

Journal Entry for Freight Charges

April 25 Inventory 300 Cash 300 add the cost of freight-in to balance of Inventory, then later those freight charges become part of cost of goods sold

Journal Entry for Purchase Discounts

April 30 Accounts Payable 2700 Inventory 54 Cash 2646 (Pay on account with a 2% purchase discount of $54) ($54= $2,700 x 2%) * add to the cost of inventory and therefore increase the cost of goods sold once those items are sold, purchase discounts subtract from the cost of inventory and therefore reduce cost of goods sold once those items are sold

At the beginning of the year, Bennett Supply has inventory of $3,500. During the year, the company purchases an additional $12,000 of inventory. An inventory count at the end of the year reveals remaining inventory of $4,000. What amount will Bennett report for cost of goods sold? A. $11,000 B. $11,500 C. $12,000 D. $12,500

B. $11,500

Which inventory cost flow assumption generally results in the lowest reported amount for cost of goods sold when inventory costs are rising? A. Lower-of-cost-or-market B. First-in, first-out (FIFO) C. Last-in, first-out (LIFO) D. Weighted-average cost

B. First-in, first-out (FIFO)

Which equation represents the operating income in the multi-step income statement? A. Net Sales - Cost of Goods Sold B. Gross Profit - Operating Expenses C. Operating Income + Non operating Revenues - Non operating Expenses D. Revenue - Expenses

B. Gross Profit - Operating Expenses

What does the average days in inventory measure? A. shows the number of times the firm sells its average inventory balance during a reporting period B. the approximate number of days the average inventory is held C. the amount by which the sale price of inventory exceeds its cost per dollar of sales

B. the approximate number of days the average inventory is held

Calculate cost of goods sold.

Beginning Inventory (asset) + Purchases During Year (asset) = Total Inventory Available for Sale - Ending Inventory (asset in balance sheet) = COST OF GOODS SOLD

Which equation represents the income before income taxes in the multi-step income statement? A. Net Sales - Cost of Goods Sold B. Gross Profit - Operating Expenses C. Operating Income + Non operating Revenues - Non operating Expenses D. Revenue - Expenses

C. Operating Income + Nonoperating Revenues - Nonoperating Expenses

What does the gross profit ratio measure? A. shows the number of times the firm sells its average inventory balance during a reporting period B. the approximate number of days the average inventory is held C. the amount by which the sale price of inventory exceeds its cost per dollar of sales

C. the amount by which the sale price of inventory exceeds its cost per dollar of sales

At the end of a reporting period, Maxwell Corporation determines that its ending inventory has a cost of $1,000 and a market value of $800. What would be the effect(s) of the adjustment to write down inventory to market value? A. Decrease total assets B. Decrease net income C. Decrease retained earnings D. All of the above

D. All of the above

Which of the following companies earn revenues by selling inventory? A. Service companies B. Manufacturing companies C. Merchandising companies D. Both manufacturing and merchandising companies

D. Both manufacturing and merchandising companies

Which equation represents the net income in the multi-step income statement? A. Net Sales - Cost of Goods Sold B. Gross Profit - Operating Expenses C. Operating Income + Non operating Revenues - Non operating Expenses D. Revenue - Expenses

D. Revenue - Expenses

Adjustment to inventory down to market value

December 31, 2015 Cost of Goods Sold 1,500 Inventory 1,500

How does the purchaser record a purchase on account for $52,500?

Inventory 52,500 Accounts Payable 52,500

Compare inventory differences in retail and manufacturing companies.

Merchandising companies: typically purchase products in finished forms to resell to customers; wholesalers: resell inventory to retail companies, retailers: purchase inventory from manufacturers or wholesalers and then sell this inventory to end users Manufacturing companies: manufacture products then sell them; raw materials: includes cost of components that will become part of the finished product but have not yet been used in production; work-in-process: products that have been started in the production process but aren't yet complete- total cost includes include raw materials, direct labor & indirect manufacturing costs; finished goods: items completed in manufacturing process

Journal Entry for Purchase Returns

October 22 Accounts Payable 550 Inventory 550 (Return inventory previously purchased on account)

How are purchases recorded differently using a periodic inventory system?

Purchases of inventory, freight-in, purchase returns & purchase discounts are recorded in temporary accounts rather than directly to Inventory. These temporary accounts are then closed in period-end adjustment and we do not record a decrease in inventory sold, but instead update the balance of Inventory in the period-end adjustment.

If cost < market, then report..... a. inventory at cost b. inventory at market (and report as an expense)

a. inventory at cost

If cost > market, then report.... a. inventory at cost b. inventory at market (and report as an expense)

b. inventory at market (and report as an expense)

Using a periodic inventory system, the purchase of inventory on account would be recorded as: A. Debit Cost of Goods Sold; credit Inventory B. Debit Inventory; credit Sales Revenue C. Debit Purchases; credit Accounts Payable D. Debit Inventory; credit Accounts Payable

c. Debit Purchases; credit Accounts Payable

Weighted-Average cost method

cost of goods available for sale/ number of units available for sale ex: $10,000 (total cost of goods available for sale) / 1,000 (total number of units available for sale)

Using a perpetua inventory system, the purchase of inventory on account would be recorded as: A. Debit Cost of Goods Sold; credit Inventory B. Debit Inventory; credit Sales Revenue C. Debit Purchases; credit Accounts Payable D. Debit Inventory; credit Accounts Payable

d. Debit Inventory; credit Accounts Payable

First- In, First- Out (FIFO)

first units purchased (first in) are the first ones sold (first out). Companies are allowed to report inventory costs by assuming which units of inventory are sold and not sold, even if this does not match the actual flow.

single step income

format that essentially uses a single calculation - total revenues - total expenses to get net income

Perpetual Inventory System

maintains a continual record of inventory purchased & sold, when purchasing inventory, companies increase Inventory account and either decrease Cash or increase Accounts Payable. When companies sell inventory, they make two entries 1) They increase an asset account (Cash or Accounts Receivable) and increase Sales Revenue, and 2) they increase Cost of Goods Sold and decrease Inventory.

Specific Identification Method

matches each unit of inventory with its actual cost, used for companies that sell unique, expensive products

Adjusting FIFO to LIFO...

need to adjust inventory from FIFO records to LIFO records. Record adjustment at the end of the period as decrease to Inventory (credit) and an increase to Cost of Goods Sold (debit)

multi-step income

shows that revenues and expenses arise from different types of activities - different levels of profit come from 1) gross profit (net sales - cost of goods sold), 2) operating income (salaries, utilities, advertising, supplies, rent, insurance & bad debts), 3) income before income taxes (non operating revenues: dividends, interest earned from investments, gains on sale of investments), 4) net income

Last-In, First-Out (LIFO)

the last units purchased (last in) are the first ones sold (first out).