Accounting Ch6 Review

The period-end adjustment in a periodic inventory system serves the purposes: 1. 2. 3.

1. Close purchase-related temporary accounts 2. Adjust the inventory balance to its proper ending balance 3. Record COGS for the period

What account is used to record a purchase of inventory for each of the following methods? 1. Perpetual Method 2. Periodic Method

1. Inventory 2. Purchases

Average days in inventory formula

365/inventory turnover ratio

In the perpetual inventory system, what is the effect of a sale of inventory on assets

Assets increase by the sales price of the inventory and decrease by the cost of the inventory

Cost of goods available for sale formula

BI + Net Purchases =

Inventory turnover ratio formula

COGS/Avg. Inventory

COGS formula

Cost of goods avail. for sale - EI

Weighted average formula

Cost of goods available for sale/number of units

Earn a purchase discount on a credit purchase entry

Debit AP (total amount without discount) Credit Inventory (for discount amount) Credit Cash (total amount without discount - discount)

Entries to sell inventory on account

Debit AR Credit Sales Debit COGS Credit Inventory

Entries for selling inventory

Debit AR/Cash, Credit Sales Rev Debit COGS, Credit Inventory

If you purchase inventory and record the entry in a purchase account, then pay the amount within a 10 day period for a 2% discount, what is debited/credit?

Debit Accounts Payable $100 Credit Purchase Discounts $2

Entry to write something down to the market value

Debit COGS Credit Inventory

Year-end adjustment using lower of cost and NRV: If the cost is more than the NRV, what is the adjustment like? If the cost is less than the NRV, is any adjustment needed?

Debit COGs, Credit Inventory (for the difference) No

Entry to purchase inventory on account

Debit Inventory Credit AP

When costs are rising, FIFO/LIFO shows the lower COGS and a higher net income

FIFO

Gross profit ratio formula

Gross profit/Net sales

For the year, Sealy Incorporated reports net sales of $50,000, cost of goods sold of $40,000, and an average inventory balance of $5,000. What is Sealy's gross profit ratio?

Gross profit/net sales = 10000/50000 = 20%

When costs are rising, FIFO/LIFO leads to a lower net income

LIFO

_______ provides a better matching of current revenues with current inventory cost

LIFO

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company using LIFO is referred to as the _____ _________

LIFO reserve

Gross profit formula

Net sales - COGS

Are land improvements added to the cost of the land?

No, they are in separate land improvements accounts

Overstating ending inventory affects net income and COGs by? Why is net income affected?

Overstatement of Net income Understatement of COGS Because COGS is an expense that affects net income

Gross Profit Formula

Sales - COGS

Inventory Costing Methods

Specific Identification FIFO LIFO Weighted-avg cost

The inventory costing method that matches each unit of inventory with its actual cost

Specific identification

The adjustment to write down inventory to market value would include:

a credit to inventory a debit to COGS (Both are for the different in cost and NRV)

Using a periodic inventory system, the sale of inventory on account would be recorded as: a. Debit Cost of Goods Sold; credit Inventory. b. Debit Inventory; credit Sales Revenue. c. Debit Sales Revenue; credit Accounts Receivable. d. Debit Inventory; credit Accounts Receivable.

a. Debit COGs, credit Inventory

Which inventory cost flow assumption generally results in the lowest reported amount for inventory when inventory costs are rising? a. Specific identification. b. First-in, first-out (FIFO). c. Last-in, first-out (LIFO). d. Average cost.

c. LIFO Don't forget that LIFO leaves behind the lowest ending inventory

In a periodic inventory system, purchase returns are recorded in _______ ________ accounts

contra-purchases

Inventory is a current/noncurrent asset

current

Which of the following levels of profitability in a multiple-step income statement represents all revenues less all expenses? a. Gross profit. b. Operating income. c. Income before income taxes. d. Net income.

d. Net income

In a periodic inventory system, shipping costs for purchased goods are debited/credited to a __________ account

debited; freight-in

Inventory errors that are discovered more than one accounting period after the error occurred

do not require a correcting entry because the error self-corrects

When inventory is sold, the cost of inventory is recognized as an ________

expense

FOB stands for

free on board

In times of rising prices, ending inventory using LIFO will be higher/lower than that of FIFO

lower (the more expensive units are used in LIFO, leaving the least expensive ones behind in EI)

NRV is also referred to as the _________ value

market

On a multi-step income statement, the category of revenues and expenses reported immediately after operating income is referred to as ___________ revenues and expenses

nonoperating

Specific identification is only ever used for ___________ and very ______________ products

unique; expensive