Accounting Ch. 6
How do you calculate cost of good sold?
(# of units of inventory sold) X (cost per unit of inventory)
Using avg cost method, how do you find ending inventory?
(# of units on hand) x (avg co$t per unit) ... units on hand is calculated after you have sold certain amount.
Using the average cost method, how do you find CGS?
(# of units sold) x (avg co$t per unit)
What is inventory classified as? And where does it appear?
Asset on balance sheet.
Using the average-cost method, how do you calculate average cost per unit?
Cost of goods available / # of units available
Inventory on the balance sheet is based on what?
Cost of inventory still on hand.
What does a company issue to document the approval of purchase returns?
Debit memorandum; (Reduce accounts payable by debiting it and credit inventory)
Freight-out paid by the seller is a __________ ?
Delivery expense; NOT part of the cost of inventory.
Which income figure is more realistic, LIFO or FIFO? Why?
LIFO because it uses the most recent inventory costs to expense
What is a LIFO liquidation? Why do managers try to avoid it?
LIFO is used and inventory quantities fall below level of previous period and must go into old layers of inventory cost. (puts older, lower costs into CGS) - increases income taxes.
Between LIFO and FIFO, which one produces the highest cost of goods sold? (assuming prices are rising)
LIFO produces the highest cost of goods sold - because the latest costs go into it and the prices have risen.
How do you find the final cost of inventory? (net amount of purchases)
Purchase price + Freight-in - purchase returns, allowances, and discounts = Net purchases of inventory (cost to the buyer)
When does the cost of inventory become an expense?
When seller delivers the goods to the buyer.
What is the disclosure principle?
company should report enough relevant and faithful info so that outsiders can make informed decisions about company
The lower-of-cost-or-market rule is based on ___________
conservatism.
Applied to inventories, market value usually means ______________
current replacement cost.
What are goods held on consignment? Are they included in inventory?
goods that belong to another company; NOT included in inventory.
What is the perpetual inventory system?
keeps running record of inventory on hand; still counts inventory on hand annually. Used for ALL types of goods;
Under the FIFO method, the cost of ending inventory is based on ________
most recent costs incurred.
Under LIFO, the cost of ending inventory is based on __________
oldest costs incurred. (from beginning inventory plus early purchases of period)
What is conservatism?
reporting financial statement amounts that paint the most cautious or moderate picture of company.
What is the periodic inventory system?
used for inexpensive goods and smaller businesses; count inventory maybe once a year; cheaper.
Ending inventory is reported at ____ value on __________
LCM value on balance sheet.
What does it mean when goods are purchased "FOB destination"?
Buyer does not own the goods until they physically receive them.
Besides cash/accts receivable sale, what other entry does a company record using the perpetual system?
CGS Inventory
What is the cost of goods sold classified as? Where does it appear?
Expense on the income statement.
Between FIFO and LIFO, which one produces the highest gross profit?
FIFO because its cost of good sold is low. (profit = revenue - CGS)
Which method reports the most up-to-date inventory cost on the balance sheet?
FIFO. ... LIFO leaves old/outdated prices in ending inventory
Btwn FOB destination and FOB shipping point, which goods are counted in year-end inventory of purchasing company?
FOB shipping point.
What does FOB stand for? What are the FOB terms?
Free on Board; indicates who owns the goods at a particular time and who must pay shipping costs
What does the inventory turnover statistic show?
How many times the company sold (turned over) its avg level of inventory during the year.
In order to have the lowest taxable income and thus, lowest income taxes... which method should be used? (prices are rising)
LIFO
Is LCM optional?
No - it is required by GAAP.
What is inventory turnover?
Ratio of CGS to average inventory.
What is gross profit? Why is it called "gross"?
Revenue (sales) - Cost of goods sold; Gross because operating expenses have not been subtracted.
With the 3 methods (LIFO, FIFO, and avg), what is the difference between the sales revenue?
Sales revenue is the same for all of them.
What does it mean when the vendor specifies "FOB shipping point"?
The buyer legally owns (is responsible for) the goods as soon as they leave the seller's hands. Purchaser must pay shipping costs
Under the FIFO method, the first costs into inventory are the first costs..... ??
assigned to cost of goods sold.
What advantage does conservatism give a business?
brake on management's optimistic tendencies; goal is representational faithfulness
What is the consistency principle?
businesses should use same methods from period to period; if changes something, company should disclose effect on net income
Under LIFO method, the last costs into inventory go immediately to ________
cost of goods sold.
What is the gross profit percentage?
gross profit / net sales revenue.
What is LCM?
requires that inventory be reported at whichever is lower (historical cost or market value)
When is the specific unit cost method used?
unique inventory items (cars, antique furniture, jewels, real estate); too expensive to use for common inventory items
What is the CGS model/equation?
Beg. Inventory + Purchases = Goods Available - Ending Inventory = CGS.
How do you find cost of goods available? # of units available?
Beginning inventory + purchases = $cost of goods available$; units available = # beginning + purchases
What is the journal entry for writing inventory down to market value?
CGS Inventory
If ending inventory in period 1 is overstated, what happens to CGS and gross profit in period 1? period 2?
CGS is under; GP is over; in period 2, CGS is over and GP is under;