Accounting for Decision Making Test 1

FOB destination point

Seller incurs transportation costs:

revenue - COGS = gross profit gross profit - S&A exp. = operating inc operating inc + other rev or exp = inc bf IT inc bf IT - IT = net income

Setup of an Income Statement:

Relevance

The capacity of information to make a difference in a decision

goods available for sale less ending inventory

The cost of goods sold is:

finished goods inventory

The inventory account a manufacturer uses to record the cost of products completed and available for sale is called:

Materiality

The magnitude of an accounting information omission or misstatement that will affect the judgement of someone relying on the information

Conservatism

The practice of using the least optimistic estimate when to estimate amounts are equally likely

Understandability

The quality of accounting information that makes it comprehensible to those willing to spend the necessary time

Faithful Representation

The quality of information that makes it complete, neutral, and free from error

Travella Co. applies the same accounting principles each accounting period

Travella Co. applies the consistency convention. What does this mean?

both the balance sheet and the income statement are affected

If the amount assigned to ending inventory is incorrect:

an integral part of the calculation of cost of goods sold

In a periodic inventory system, the cost of purchases is recognized as:

both the periodic and perpetual inventory system

In order to determine inventory for its balance sheet, it is best for a company to count the inventory at the end of its accounting period for:

comparison with its current ratio for the current year

Lottony Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10% since last year. Which of the following would be the least useful comparison in evaluating the drop in Lottony's profit margin?

cost/benefit

Many companies assign only the net invoice price for merchandise to inventory and cost of goods sold. All other costs, including transportation and other costs of bringing merchandise to the place of business, are charged to the expense of the period in which they were incurred. Which accounting principle or concept is applied in this example?

sales - sales returns and allowances - sales discounts

Net sales formula:

merchandise inventory

Which would not be found in the assets on the balance sheet of a manufacturer?

COGS / average inventory

Inventory turnover ratio formula:

current assets - current liabilities

Working capital formula:

part of cost of goods purchased

Transportation-in is:

replacement cost

Which method of inventory costing is not acceptable for financial accounting purposes?

Consistency

For accounting information, the quality that allows a user to compare two or more accounting periods for a single company

Comparability

For accounting information, the quality that allows a user to compare two or more companies and look for similarities and differences

income statement and statement of retained earnings

Forman, Inc. earned $600,000 profit during 2016. On which financial statement(s) will you find the dollar amount of the profit earned by the company?

gross profit / net sales

Gross profit ratio formula:

current assets

How are assets which are expected to be realied in cash, sold, or consumed within the normal operating cycle of a business or within one year reported on a classified balance sheet?

in contra accounts to the purchases account

How are purchase discounts and purchase returns recorded by a company using the periodic inventory system?

FOB shipping point

Buyer incurs transportation costs:

net sales - COGS

Gross profit formula:

write-down of inventory can be reversed in later periods under U.S. GAAP

All of the following statements are true except:

no net effect

Blenham Inc. sells merchandise on credit. If a customer pays their balance due after the discount period ends, what is the effect of the payment on Blenham's accounting equation?

operating, investing, and financing activities

Business entities generally carry on:

cost of goods available for sale - ending inventory

COGS formula:

beg inventory + cost of goods purchased

Cost of goods available for sale formula:

current assets / current liabilities

Current ratio formula:

current ratio

Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the company's short-run liquidity, which measure should be used?

current assets minus current liabilities

What is the correct method for calculating working capital?

weighted average cost x # of units in ending inventory

What is the formula for ending inventory using weighted average cost?

cost of goods available for sale/units available for sale

What is the formula for weighted average cost?

to provide useful information for decision making

What is the primary objective of financial reporting?

LIFO for tax reporting and FIFO for financial reporting

What situation is not allowed by federal income tax rules?

FIFO

Which inventory costing method results in the lowest income tax expense during a period of decreasing prices?

recievables

Which is not a major category for long-term assets?

LIFO

Which method might allow a company to make significant inventory purchases at year end for the purpose of manipulating income?

to help the users reach their decision in an informed manner

Which of the following is the best description of the purpose of financial reporting?

the lower of cost or market method is an exception to the historical cost principle

Which of the following statements regarding the application of lower cost or market method is true?