Ch. 6
Average Inventory =
(Beginning inventory + Ending inventory) / 2
Net sales =
= Revenue
HIFO (Highest In, First Out)
Inventory with the highest cost of purchase is the first to be used or taken out of stock. Inventory expense will be the highest possible. Chosen if companies want to decrease taxable income for a period of time.
Assets =
Liabilities + Stockholders' Equity
LIFO (Last In, First Out)
Most recently purchased inventory is recorded as used first.
Gross Profit =
Net sales - cost of goods sold
Net Purchases =
Purchases - Purchase returns & allowances + freight in
An overstatement of ending inventory in one period results in
an understatement of net income of the next period
How is inventory classified in the financial statements?
as an asset
How is inventory classified?
as an asset
Explain why cost of goods sold is highest under LIFO. Be specific.
because the costs of the goods purchased or produced have been increasing over the past decades.
Cost of goods sold =
beginning inventory + net purchases - ending inventy
When applying the lower-of-cost-or-market rule to inventory, "market" generally means
current replacement cost
Application of the lower-of-cost-or-market rule often
results in a lower inventory value.
Gross profit
sales minus cost of goods sold (key indicator of a company's ability to sell inventory at a profit.)
Estimated cost of goods sold =
sales revenue - (normal gross profit * sales revenue)
An error overstating ending inventory in 2016 will NOT
understate 2016 net income.
Gross profit method (gross margin method)
used to estimate ending inventory.
For these transactions, show what Cozelle will report for inventory, revenues, and expenses on its financial statements at the end of the month. Report gross profit on the appropriate statement.
Balance sheet (current assets): inventory. Income Statement: Sales Revenue - Cost of goods sold = gross profit
Ending Inventory =
Beginning Inventory + Purchases - Cost of goods sold
(3 items) Cost of goods sold =
Beginning inventory + net purchases - ending inventory
Goods available =
Beginning inventory + purchases
cost-of-goods-sold model
Beginning inventory + purchases - ending inventory = cost of goods sold.
(normal balance) Stockholders' Equity =
Common Stock + Retained Earnings + Revenues - Expenses - Dividends
(2 items) Cost of goods sold =
Cost of goods available for sale - Ending inventory
Inventory turnover =
Cost of goods sold / average inventory
During a period of rising prices, the inventory method that will yield the highest net income and asset value is
FIFO
Inventory distribution method
Goal: reduce inventory costs and improve product quality.
Gross Profit percentage =
Gross Profit (net sales - cost of goods sold) / Net Sales (revenue)
Net income =
Gross profit (revenues - cost of goods sold) - expenses
FIFO (First In, First Out)
Oldest inventory is recorded as used first.
Net Purchases =
Purchases - Purchase returns and allowances + Freight in
Cost of goods sold appears on which financial statement
income statement
Cost of goods sold =
inventory purchase cost * percent sold
Journalize these transactions...
inventory/accounts payable; accounts receivable/sale revenue; cost of goods sold/inventory; cash/accounts receivable
For FIFO, average cost, and LIFO this is always the same
total $ amount (sum of all inventory costs)
average cost method
value of a pool of assets or expenses is assumed to be equal to the average cost of the assets or expenses in the pool
