Exam 3- chapter 5 & 6

Discount terms of 1/10, N/45 MEANS:

1% discount if paid within 10 days "1" shows the discount percentage offered by the seller. "10" indicates the number of days (from the invoice date) within which the buyer should pay the invoice in order to receive the discount. "n/45" states that if the buyer does not pay the (full) invoice amount within the 10 days to qualify for the discount, then the net amount is due within 45 days after the sales invoice date.

List two types of controls safeguard assets.

1. physical controls 2. complete and reliable recordkeeping

What is depreciation expense under straight-line?

= Depreciable Cost / Useful Life = ($18,000 - 3,000) / 5 = $3,000

What does the gross profit percentage measure? How is calculated?

It measure the proportion of sales dollars remaining after paying for the goods sold. The gross profit percentage is calculated by dividing gross profit by net sales.

What does the inventory turnover ratio measure? What does average-days-in-inventory mean?

It measures how quickly a firm is selling its inventory it indicates the number of times the company turns over (sells and replaces) its inventory during the period. The average-days-in-inventory indicates the average number of days an item is held in inventory.

On which financial statement(s) would the gain or loss appear?

A gain or loss is reported on the income statement.

Depreciation is defined as:

A systematic, rational process to allocate the cost of a long-term asset

Does LIFO or FIFO give the best - most current- balance sheet value for the ending inventory? why?

FIFO gives the most current Balance Sheet Value for ending inventory because it assigns the cost of the last goods purchased to inventory on hand. LIFO, on the other hand, assigns the cost of the oldest goods to ending inventory. SO FIFO is a better Balance Sheet Value.

Net sales

is the gross amount of Sales minus Sales Returns and Allowances, and Sales Discounts for the time interval indicated on the income statement.

How does goodwill arise?

Goodwill arises when one company purchases another and pays a price that is greater than the fair market value of the assets less the liabilities assumed.

If inventory costs are rising which method (FIFO, LIFO, or Weighted Average Cost) results in the lowest Net Income?

If inventory costs are rising, LIFO results in the lowest Net Income because the goods with the highest costs (most recent purchases) are assumed to have been sold and these higher costs are assigned to Cost of Good Sold.

How do taxes affect the choice between LIFO and FIFO?

In periods of rising prices, LIFO gives you a larger amount for Costs of Goods Sold, which gives you a lower amount of Net Income. If Net Income is lower under LIFO, your taxes are lower. Conversely, in periods of declining prices, FIFO gives you a larger amount for Cost of Goods Sold, which would give you a lower Net Income, and your taxes are lower. Lower taxes mean higher cash flows (less cash for taxes).

Amortization is used to describe the expensing of:

Intangible assets

Does the periodic or perpetual choice affect the choice of a cost flow (LIFO versus FIFO) method? Explain.

No, each cost flow method can be used in conjunction with either periodic or perpetual systems.

How do you calculate the return on assets (ROA) ratio and what does the ratio measure?

Return on assets is calculated by dividing net income plus interest expense by the average total assets. The ratio is a measure of profitability, or how effectively the company is using its assets to generate revenue.

How do you calculate the asset turnover ratio and what does this ratio measure?

The asset turnover ratio is calculated by dividing net sales by average total assets. The asset turnover ratio is a measure of sales dollars generated by the investment in assets. It indicates how efficiently a company is using its assets.

How is a gain or loss on the disposal of an asset calculated?

The gain or loss on the sale of an asset is calculated by comparing the proceeds received from the sale to the book value of the asset.

What are some of the risks associated with inventory? How do managers minimized these risks?

The risks associated with inventory include loss by theft or damage and obsolescence. Damage and theft can be minimized with physical controls such as passwords and security locks. Risk of obsolescence can be minimized with rapid inventory turnover.

What is the lower-of-or-market rule and why is it necessary?

Under this rule, inventory must be recorded at the lower of the inventory's cost or market value. This rule prevents overstatement of inventory on the Balance Sheet.