EXAM 2 LEARNSMART BUNDLE (CH4.6.7)

If a company where to ignore the fact that the market value of his inventory is lower than its cost then

It's assets and stockholders equity would be overstated

Corporations with high sales volume usually have

Low gross profit percentages

companies that sell goods they have produced

Manufacturing companies

Applying the lower of cost or market rule results in inventory being reported at the

Market value is lower than cost

if a companys adjusted income is 10000 and income tax is usually 20% then what is the net income

8000

what Effect does the inventory costing method have on the income statement

Cost of good sold, Gross profit, income from operations, income for for income tax expense, income tax expense and net income

Mini companies report or lower of cost or market write down expense as

Cost of goods sold

In a periodic system that in the period adjustment that adjust cost of good sold for the amount and ending inventory requires a _____to cost of good sold

Credit

in a perpetual system the entry to record the sale of merchandise to a customer on account would include a

D- Cost of goods sold D- accounts recievable C- sales revenue C-inventory

Days to sell measures the average number of

Days from the time inventory is purchased to the time it is sold

an adjustment entry that debits sales revenue and credit refund liability as well as debit inventory estimated for returns and credits cost of goods is recording the

Estimated returns

T/F gross profit is a stockholders equity account and is credited when goods are delivered to customers

F, it is a subtotal and found on the income statement

(TRUE OR FALSE) retained earnings is involved in the closing process it is considered as a temporary account

FALSE

When a company assumes that it's inventory cost flow out in the opposite order from which is a good were purchased it uses _______ to value it's inventory

FIFO

Inventory costing methods are based on assumptions that accountants make about the flow of inventory cost is what

FIFO LIFO

Example of merchandise inventory

Good held for sale in the normal course of business

Consignment inventory refers to

Good of a company is holding on behalf of the actual owner of goods. the company is willing to try to sell the goods for the owner for a fee

Which of the following is merchandise inventory

Goods held for sale in the normal course of business

When cost to purchase inventory are falling over time using LIFO leads to reporting ______ than FIFO

Higher inventory on the balance sheet

The assumption that a company makes about his inventory cost the flow can affect cost of goods sold on its ________ and inventory on its _______

Income statement balance sheet

Goals of inventory managers include

-making sure that inventory quality meets customer expectations -having enough inventory on hand to meet customer demand - keeping the cost of buying and storing inventory as low as possible

the adjustment to record inventory shrinkage will increase

cost of goods sold on income statement

Inventory consists of

costs needed to get the inventory ready for sale

for companies that generate net income during the current year will cause a net _____entry to retained earnings

credit

Accumulated depreciation has a normal _______ account. this means that it will _______ total assets

credit, decrease

supplies are ______inventory is an _______ intended to be __________

current assets, used

since the account represents a cost incurred on borrowed money it is called an _________ account

expense

Adjustments help to ensure that all ______ are recorded in the period in which they are incurred

expenses

Amortization is the concept that applies to the

expensing of long-term assets that lack physical substance over their useful lives

What does FIFO stand for?

first in first out

Merchandisers record revenue when they

fulfill their performance obligations by transferring control of the goods to customers

what is found on the income statement of a merchandiser

gross profit sales revenue cost of goods sold

As inventory quality increases, its cost usually

increases

purpose of recording an adjustment to wages and salaries is to record wages

incurred but not yet paid

The cost of borrowing money is called

interest

accounts payable is debited ______ creditied ______

is debited when owed amounts are repaid is credited when purchases are made on account

why is inventory reported as a current asset

it will be converted into cash within a year of the balance sheet date.

What does LIFO stand for?

last in first out

what are the effect of adjusting when using the accounting equation(A=L+SE)

liabilities will decrease SE will increase

interest not yet paid should be recorded as an expense AND a _____

liability

Net Sales on an income statement equals Sales Revenue

minus sales return, discounts, allowances

which line item is reported on both the income statement and statement of retained earnings

net income

gross profit equals

net sales - cost of goods sold

wheter purchase discounts are recorded using gross or net method , ultimately purchase discounts taken are

reductions to inventory

Whether purchase discounts are recorded using gross or net method, ultimately purchase discounts taken are

reductions to inverntory

net income is recorded in the retained earnings account when _____ and ______accounts are closed and trandferred into retained earnings

revenue, expense

adjusting entries endsure that

revenues recongnized and expenses inccured during the period are reflected on the income statement

deferred revenue reports

the amount collected in advance for which the seller has not fulfilled its obligations

the adjusted trial balance will be used to determine

the asset and liability balances on the balance sheet

the balance of retained earnings prior to the closing process equals

the balance at the end of the previous accounting period

the balance in retained earnings prior to the closing process equals

the balance at the end of the prvious accounting period

the equipment balance in companys ledger is equal to

the beginning balance

how does the adjustment of depreciation differ from other deferral adjustments

the depreciation adjustment uses a contra-account rather than reducing the assets directly

to calculate a company income tax obligation

the income tax (before tax) is multiplied by companys tax rate

When the bundle includes only products, this situation is easy to account for because the seller fulfills its performance obligations at

the same time

if sales return and allowances are a larger dollar amount relative to intial sales revenue it may mean

they are a product qualities issue

FOB destinantion means the goods are owned by the buyer as soon as

they arrive at the buyers place of business

the adjusting entry to record wages incurred but not yet recorded includes a credit to

wages payable

FOB shipping point

when ownership of goods transfers to a buyer as soon as the goods leave the sellers place of business

why is the balance in the depreciation expense account generally different form the balance of accumulated expense account

accumulated contains depreciation since the asset was purchased. depreciation only reflects the current

the buyers or merchanice with shipping terms FOB shipping point will...

add the transportation cost to its inventory account

Closing entries are recorded

after financial statements have been prepared

adjusting entries never affect the asset account is called

cash

deferral adjustments occurs when

cash has been exchanged in a prior transaction

accrual adjustments occurs when

cash has not been exchanged in prior transaction

deferred revenue is charged when

cash is collected in advance of the revenue

the step of the accounting where entries are recorded to updated retained earnings where the accounts have a zero balance is called the

closing process

Sales Returns and Allowances is a ________ account and is _______when goods are returned by customers for a refund

contra-revenue, debited

cost of goods sold on income statement reports the

cost X the quanitiy

And understatement of the 2018 ending inventory will affect

- 2019 beginning inventory - 2019 cost of goods sold - 2018 cost of goods sold

Which of the following would be considered inventory for a merchandiser

Accquired goods for resale

DELETE

DELETE

(TRUE OR FALSE) revenues, expenses, and dividends are considered temporary accounts

TRUE

The inventory costing methods determine

The amount of debit of cost of good sold in credit to inventory

Does FIFO perpetual and FIFO periodic inventory EQUAL?

YES

interest payable is

a liability on the balance sheet and exspresses how much is owed

a closing entry may include

credit to Wages Expense

in a perpetual system the entry to record the sale of merchandise includes a

debit to cost of goods sold

salaries and wages payable are

debited when the wages that are previously recorded are paid

sales transactions affect

income statement and balance sheet

Manufacturing company

makes the finished goods

which inventory system updates the inventory acount ONLY at the end of the accounting period

periodic

inventory system records a change in inventory account everytime goods are bought, sold, returned

perputal

How do temporary accounts differ from permanent accounts

temp accounts are closed at the end of the accounting period

which Inventory accounting methods are acceptable under US GAAP

- LIFO - Weighted average - specific identification - FIFO

What would explain an increase in a companies inventory turnover ratio

- a decrease in total inventory - an increase in the demand for the companys product

entries needed for the closing process

-Credit Dividends Declared and debit Retained Earnings - Debit each revenue, credit each expense, and record the difference in Retained Earnings.

The inventory costing method "Weighted average cost"

-adds together the total cost of all goods available for sale during the period -then divide that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory

If cost of acquiring inventory is rising LIFO will result in which of the following compared to FIFO

-cost of goods sold will be higher -Income tax expense will be lower -Gross profit will be lower

Gross profit is

-equal to net sales - cost of goods sold - A subtotal on the income statement

what income statement items are affected by the inventory method chosen

-income from operations - net income - income before tax expense - gross profit - income tax expense

The gross profit percentage measures the percentage of profit earned on each dollar of sales before deducting all expenses other than cost of goods the ratio is to:

1. Compare one company with another 2. Make comparisons over time

the expense recognition principle requires

an adjustment for income tax expenses owed attribute to the net income earned during that period

Specific Identification

an inventory method that tracks which item is actually sold in cost of goods sold for the actual cost of the item

perpetual updating formula

beginning Inventory + Purchases - Cost of Goods Sold = Ending Inventory

in a perpetual system the entry to record a purchase of merchandise on account includes a

credit to accounts payable debit to inventory

inventory is an _______ intended to be __________

current asset, sold

Which financial statements are needed to calculate the inventory turnover ratio

income statement and balance sheet

what type of adjusting entry to recorded last

income tax inferred

where are reports made to the public

- statement of cash flows - balance sheet- income sheet - notes to financial statement - statement of retained earnings

the defferred T- account will show what??

- the amounts the seller has fulfilled that were collected in advance on the debit side - the normal ending balance on the credit side - amounts recived in advance that seller hasnt fulfilled of its obligations on the credit side

perpetual inventory system

- updates inventory records every time an item is bought - provides the best inventory control because its continuous tracking of transactions allows companies to instantly determine the quantity of products on the shelves and to evaluate the amount of time they have spent there. - records all goods purchased and sold

In which ways does a periodic differ from perpetul system

1. Inventory is not updated until the end of the accounting period in the periodic system 2. Cost of goods sold is not updated until the end of the accounting period in the periodic system

what is reported on the income statement

1. sales revenue 2. cost of goods sold 3. gross profit

Goods in transit that have FOB shipping point should be included in the _______ inventory

Buyers

In a perpetual inventory system inventory is initially recorded at

Cost

Specific identification weighted average cost LIFO in the FIFO are generally accepted

Costing methods

First step when determining cost of good sold

Count the number of units on hand

After each selling merchandise to a customer both inventory and cost of goods sold are

Kept up-to-date in a perpetual system

How is the lower of cost or market rule applied when there are more than two types of inventory

Only the items that have market values lower than the cost will be written down

The _________ inventory system that records all inventory related transactions in the inventory account and reduces inventory at the time of sale

Periodic

The ________ inventory system as a separate account for these items and records cost of good sold at the end of the accounting period

Perpetual

Supplies should be ______ and Supplies Expense should be ______ for supplies used up during the period.

decrease, increase

supplies should _____ and supplies expense should _____ during the period

decrease, increase

prepayment for items such as rent are recorded as assets and later recorded as

expense

in an accrual adjustment for expenses incurred but not yet paid, a liability is

increased because cash will be paid in the future due to the expense incurred

the reason of recording an adjusted entry for salaries and wages is to record wages

incurred but not yet paid

in a perpetual system, the _______ account is debited when a company purchases merchandise on account

inventory

Goods in transit are

inventory items being transported from a seller to a buyer

what is true about post-closing trial balance

it is an internal report prepared as the last step of the accounting cycle

purpose of making an adjusted trial balance

to make sure total debits still equal total credits

effects of the financial condition of the business from the adjustment for revenues from the seller fulfilling its obligations that haven't been yet collected

total assets will increase and SE will increase

After the adjustments have been completed, the adjusted balance in the Interest Expense account represents

total interest that has been paid during the period

service company

will typically not put inventory on balance sheet or cost of goods sold on income statement

The inventory turnover ratio directly measures

The times per period the average inventory balance is sold

If ending inventory in year one is misstated than year ones _______also must misstated

Cost of good sold

Which of the following may occur with a higher inventory turnover ratio

- reduction in obsolescence - Reduction in inventory storage cost

items netted against sales revenue arrive at net sales

- sales returns - sales discounts - sales allowances

When will Accounts Receivable be involved in an adjusting entry?

REV is earned but not yet collected or recorded at the end of the period

wholesaler

buys goods and sells them to companies that will then sell them to individuals

FIFO is an

- An inventory costing method - Describes how to calculate the cost of goods sold

What might cause the value of inventory to fall below its original cost

- Damage - Increased competition - Obsolescence from going out of style

The rising unit costs rank

- FIFO - weighted average - LIFO

the adjusting entry to record amortization causes

- assets to decrease - SE to decrease

journal entry to record taking a discount when paying for goods previously purchased on account and recorded using the gross method includes

- debit to a liability account - credit to two assets accounts

To ensure the accuracy of inventory accounted for using the perpetual system physical counts

- detect bookkeeping errors - detect shrinkage - detect theft

which may require an accrual adjusting that's recorded with a debit to an expense and a credit to a liability

- interest owed on notes payable - utilities to be paid at a later date

In a periodic system the entry to transfer beginning inventory and net purchases to cost of goods sold includes a

1. Debit to cost of goods sold 2. Credit to purchases 3. Credit to inventory beginning

Find step revenue model for bundle sale

1. Identify the contract 2. Identify the sellers performance obligations 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when each performance obligation is satisfied

The journal entry to record the payment within the discount. For goods previously purchased on account and recorded using the net method causes

1. Total assets to decrease 2. Total liabilities to decrease

The 3 effects of sales returns and allowances

1. are typically recorded after the intial sale when the actual return or allowances occur 2. are adjusted at the end of the accounting period for estimated returns and allowances exspected to occur in the following months 3. reduce the amount the seller exspects to recieve from the customers

Using a perpetual inventory system when a company records A sale of merchandise it must also record

A decrease in inventory Cost of goods sold, which will be reported on the income statement

Ending Inventory Equation

Beginning Inventory + Purchases - Cost of Goods Sold

FIFO perpetual formula

Beginning inventory+purchases =goods available for sale ——- goods available for sale - Cost of goods sold =ending inventory

The journal entry to record a write down of inventory from cost to it's lower market value includes a

Debit to cost of goods sold Credit to inventory

the adjusting entry to record depreciation includes a debit to_____ and credit to ________

Depreciation Expense Accumulated Depreciation

gross profit is calculated by

Net sales- cost of goods sold , THEN divide by net sales, THEN multiply by 100

To find a description of the inventory accounting method used by a company you need to look at the

Notes to the financial statement

The inventory methods apply to both

Perpetual and periodic inventory systems

The operating cycle is a series of activities at the company undertakes to generate _________ and ultimately cash

Revenue

Which line item would be found on a merchandisers income sheet and not on a service firms

Sales revenue, cost of goods sold

Good in transit that have terms FOB destination should be included in the _______ inventory

Sellers

True or false LIFO is not allowed by IFRS which makes comparisons of international companies with US companies difficult

True

Raw materials that have been moved into the production process become _________ inventory

Work in progress

what does the sales discount 2/10 , n/30 mean

You can take a 2% discount if you pay within 10 days, or the full amount is due within 30 days.

a journal entry to record the return of merchandise previously purchased on account was debiting inventory and crediting accounts payable what will happen to the entry

assets and liabilities will be overstated

the cost of goods sold equation

beginning inventory + purchases - ending inventory

Periodic Updating formula

beginning inventory + purchases - ending inventory = cost of goods sold

retailers

businesses that sell directly to individuals

In a periodic system that in the period adjustment to transfer beginning inventory and the cost of goods sold requires a ________ to cost of goods sold

debit

Using the gross method, the journal entry to record taking a discount when paying for goods previously purchased on account includes

decrease in assets/liabilities

entry to record the revenue recongnized from the service porption of a bundle sale that was collected in advance is recoreded with a debit to _____ and a credit to ______

defferred revenue, service revenue