Chapter 6 study guide

First in first out FIFO

: It assumes the first units purchased (the first in) are the first ones sold (the first out). -matches physical flow for most companies -ending inventory reflects the current cost -balance sheet approach

Cost of goods sold is:

Cost of goods sold is an expense account reported in the income statement

Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system?

Costs of incoming freight charges on merchandise inventory

Which inventory method or cost flow assumption most closely resembles the actual physical flow of goods?

FIFO- Supermarkets, sporting goods stores, clothing shops, electronics stores, or just about any company you're familiar with generally sells its oldest inventory first (first-in, first-out).

Which of the following inventory accounts consists of items for which the manufacturing process is complete

Finished goods

weighted average cost method

It assumes that both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale.

Last in first out LIFO

It assumes that the last units purchased (the last in) are the first ones sold (the first out). Cost of goods sold reflects the current cost Income-statement approach

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?

LIFO-we assume that the last units purchased (the last ones in) are the first ones sold (the first out). If prices are rising, cost of goods sold would be composed of the latest (and highest) costs using LIFO

When a periodic inventory system and the FIFO method are used, which of the following is correct?

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

Manufacturing companies buy the inputs for the products they manufacture

Thus, we classify inventory for a manufacturer into three categories: (1) raw materials, (2) work in process, and (3) finished goods:

periodic inventory system

calculates the balance of inventory once per period, at the end, based on a physical count of inventory on hand

work in progress inventory

consists of products that are not yet complete,.

cost of goods sold

cost of the inventory sold reported as an expense on the income statement. inventory sold

net income

equals all revenues minus all expenses.

operating income

equals gross profit minus operating expenses.

Gross Profit

equals net revenues (or net sales) minus cost of goods sold.

income before taxes

equals operating income plus nonoperating revenues and minus nonoperating expenses

inventory

includes items a company intends for sale to customers in the ordinary course of business -includes items that are not yet finished products. -Generally reported on the balance sheet

specific identification method

inventory costing method that matches or identifies each unit of inventory with its actual cost ex: an automobile has a unique serial number that we can match in an invoice identifying the original price

raw materials

is the cost of components that will become finished products,

Which level of profitability is considered profit from normal operations

operating income

An inventory error that understates the amount of ending inventory will result in which of the following in the current year?

overstated cost of goods sold

manufacturing companies

produce the inventories they sell, rather than buying them in finished form from suppliers. Apple Inc., Coca-Cola, Harley-Davidson, ExxonMobil, Ford, Sony, and Intel are manufacturers. (wholesalers or retailers)

perceptual inventory system

record of inventory purchased and sold

finished goods

•inventory consists of items for which the manufacturing process is complete.