acct test 2 chapter 6

multiple-step income statement

*Gross profit =net revenues (or net sales)- cost of goods sold *Operating income =gross profit - operating expenses *Income before income taxes= operating income+ nonoperating revenues and - nonoperating expenses *Net income = all revenues - all expenses.

LIFO method

-Cost of goods sold reflects current cost -Income-statement approach -TAX SAVING

periodic inventory system

-Does not maintain a continual record of inventory -Periodically adjusts for purchase and sale of inventory

FIFO method

-Matches physical flow for most companies -Ending inventory reflects current cost -Balance-sheet approach

perpetual inventory system

-maintains a continual record of inventory -helps a company better manage inventory levels -most often used in practice

average days in inventory

365/inventory turnover ratio

Net sales are $100,000 and cost of goods sold is $70,000. Inventory balances for the past two years are $10,000 and $20,000. What is the inventory turnover? A. 4.67 times per year B. 7.00 times per year C. 6.67 times per year D. 3.50 times per year

A. 4.67 times per year

At the end of the year, a company reports the following inventory amounts ($ per unit): Item # of Units Cost Net Realizable Value A 100 $4 $8 B 150 $8 $6 The year-end adjustment using the lower of cost and net realizable value would include: A. A credit to Inventory for $300 B. A debit to Cost of Goods Sold for $400 C. A debit to Inventory for $500 D. A credit to Cost of Goods Sold for $700

A. A credit to inventory for $300

Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system? A. Costs of incoming freight charges on merchandise inventory B. A return of damaged inventory to the vendor C. A purchase discount taken for prompt payment D. Shipping charges for outgoing inventory

A. Costs of incoming freight charges on merchandise inventory

Which inventory method or cost flow assumption most closely resembles the actual physical flow of goods? A. FIFO B. LIFO C. Weighted-average D. FILO

A. FIFO

An inventory error that understates the amount of ending inventory will result in which of the following in the current year? A. Overstated cost of goods sold B. Overstated net income C. Overstated assets D. Overstated gross profit

A. Overstated costs of goods sold

Cost of goods sold is: A. Reported in the income statement B. Reported in the balance sheet C. A current asset D. The cost of inventory on hand at the end of the period

A. reported in the income statement

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the FIFO method if 120 units were sold in January? A. $ 600 B. $ 500 C. $ 620 D. $ 720

B. $500

During a period of rising prices, which inventory cost flow assumption would result in the highest cost of goods sold, and thereby the lowest net income? A. FIFO B. LIFO C. Weighted-average D. FILO

B. LIFO

When a periodic inventory system and the FIFO method are used, which of the following is correct? A. The inventory account will be continuously updated. B. The amount of cost of goods sold will be the same under a perpetual system and the FIFO method. C. The cost of goods sold account will be debited for the cost of each sale made. D. The amount of ending inventory will be larger under a perpetual system and the FIFO method

B. The amount of cost of goods sold will be the same under a perpetual system and the FIFO method.

Which level of profitability is considered profit from normal operations? A. Gross profit B. Operating income C. Income before taxes D. Net income

B. operating income

Weighted-average Cost

Cost of goods available for sale/number of units available for sale

At the end of the year, a company reports the following inventory amounts ($ per unit): Item # of Units Cost Net Realizable Value A 100 $4 $8 B 150 $8 $6 The amount to report for ending inventory using the lower of cost and net realizable value is: A. $1,600 B. $1,700 C. $2,000 D. $1,300

D. $1,300

A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the LIFO method if 120 units were sold in January? A. $ 600 B. $ 500 C. $ 720 D. $ 700

D. $700

Which of the following inventory accounts consists of items for which the manufacturing process is complete? A. Raw Materials B. Work in Process C. Cost of Goods Sold D. Finished Goods

D. Finished Goods

freight charges

Freight-in (shipments from suppliers) Freight-out (shipments to customers)

purchase return

buyer returns unwanted or defective inventory

Inventory Turnover Ratio

cost of goods sold/average inventory

costs of goods sold

cost of inventory sold

purchase discount

discount offered by seller to buyer for quick payment

Gross profit ratio

gross profit/net sales

inventory

items a company intends for sale to customers