ACCT ch 6

A company's sales equal 60,000 and COGS equals 20,000. its beginning inventory was 1,600 and its ending inventory is 2,400. the company's inventory turnover ratio equals:

10 times 20,000 --------------------- [(1,600 + 2400)/2}

For the year, Simmons Incorporated reports net sales of $100,000, cost of goods sold of $80,000, and an average inventory balance of $40,000. What is Simmons' gross profit ratio?

20% 80,000 -------- = 2 40000 100,000 - 80,000 ------------------- x 100 100,000 =20%

average days in inventory

365 ------------------- inventory turnover ratio

Using a perpetual inventory system, how should a company record the sale of inventory costing $620 and $960 on account?

Accounts reci xxx sales rev xxx COGS XXX Inventory XXX

how to record return of inventory previously purchased on acct for $200

Accts pay 200 Inv 200

On may 1, a company purchased inventory costing 2000 on acct with terms 2/10, n/30. On may 8, the company pays for this inventory and records how do you record this under perpetual system

Accts payable 2000 inventory 40 cash 1960

why would companies choose weighted average

Amounts will fall between the FIFO and LIFO amounts "Middle of the road" approach

Where is inventory classified in the financial statements?

Current asset in the balance sheet

Which inventory cost flow method most realistically matches the current cost of inventory with the current revenue it produces?

LIFO

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the...

LIFO reserve

inventory is classified as....

a current asset.

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

assets increase by the sales price of the inventory assets decrease by the cost of the inventory

True or false: Income tax expense may be disclosed either on the income statement or in the notes to the financial statements.

false Income tax expense must be disclosed as a separate line item on the income statement.

A multiple-step income statement reports multiple levels of _____

income

Combining operating income with non-operating revenues and expenses yields...

income before income taxes

Net Income Equation

income before income taxes - income tax expense

Purchasing inventory on account:

increases liabilities increases assets

A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:

inventory

Items held for sale in the normal course of business are referred to as______

inventory

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

inventory

Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because:

inventory costs generally change over time.

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.) Current assets. inventory. cost of goods sold. liabilities.

inventory. cost of goods sold.

Different types of inventory

manufacturing merchandising

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

multiple-step

Income before income taxes is calculated by combining operating income with...

non-operating income

FOB shipping point

the purchaser paid the shipping cost Ownership of the goods will pass to the purchaser at the point of shipment (when the inventory leaves the supplier's warehouse).

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)

total assets increase net income increases stockholders' equity increases

True or false: When goods are sold, the cost of the goods is transferred from the Inventory account to the Cost of Goods Sold account.

true Inventory represents goods not yet sold, and cost of goods sold represents an expense for the cost of the goods sold.

On a multiple step income statement, the category of revenues and expenses reported immediately after operating income is referred to as ___ revenues and expenses.

nonoperating

Revenues and expenses arising from activities that are not part of the company's operations are classified as ______ revenues and expenses.

nonoperating

FOB destination

the seller paid the shipping cost. Ownership of the goods will pass to the purchaser when the inventory arrives at the buyer's destination.

The specific identification method (select all that apply): is not an acceptable method of accounting would be beneficial to a company that makes inexpensive products with high sales volume would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost

would be beneficial to a company that makes fine jewelry matches each unit of inventory with its actual cost

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Cost of Goods Sold Inventory

Clark uses the perpetual inventory system. Clark sells goods to a customer on account for $1,000. The cost of the goods sold was $700. Which of the following entries are required?

Debit Accounts Receivable $1,000; credit Sales Revenue $1,000 Debit Cost of Goods Sold $700; credit Inventory $700

The definition of inventory includes which of the following items? Items held for resale Materials used currently in the production of goods to be sold Items currently in production for future sale items held for use or disposal

Items held for resale Materials used currently in the production of goods to be sold Items currently in production for future sale

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

The cumulative difference between reporting inventory at LIFO rather than FIFO is commonly referred to as the...

LIFO reserve

The definition of inventory includes which of the following items? Materials used currently in the production of goods to be sold Items currently in production for future sale Items held for resale Items held for use or disposal

Materials used currently in the production of goods to be sold Items currently in production for future sale Items held for resale

_____ companies purchase inventory that is primarily in finished form and ready for resale to customers.

Merchandising

____companies purchase inventory that is primarily in finished form and ready for resale to customers.

Merchandising

Gross Profit is...

Net Sales Revenue - Cost of Goods Sold.

income before taxes

Operating Income+/-Other Income or Expenses

Which of the following costs are recognized in work in process for a manufacturing company? Overhead Interest expense Direct labor Cost of goods sold Raw materials

Overhead Direct labor Raw materials

which inventory system: Sherman Company recognizes cost of goods sold after completing a physical inventory.

Periodic inventory system

which inventory system: Peter Company recognizes cost of goods sold each time it recognizes a sale.

Perpetual Inventory System

Gross profit Ratio

gross profit ---------------------- net sales

Operating Income

gross profit - operating expenses

Net sales revenue minus cost of goods sold is...

gross profit.

Combining operating income with non-operating revenues and expenses yields ...

income before income taxes

Maxwell Corporation has the following inventory information at the end of the year: Inventory Quantity Unit Cost Unit NRV Item A 20 $ 20 $ 35 Item B 50 $30 25 Item C 40 $10 15 Using the lower of cost and net realizable method, for what amount would Maxwell report ending inventory?

$2,050 Lower of cost or NRV (b) 20 25 10 quantity (a) a x b 20 x 20 = 400 50 x 25 = 1,250 40 x 10 = 400 --------- 2050

Blog Inc., has net sales of $50,000, cost of goods sold of $30,000, and selling expenses of $5,000. Its gross profit is _____.

$20,000 Gross profit = sales-cost of goods sold.

Prather Inc. has sales of $100,000, sales returns of $5,000, cost of goods sold of $60,000, and selling expenses of $3,000. Calculate gross profit.

$35,000 Net sales is $95,000 ($100,000 - 5,000). Net sales of $95,000 less cost of goods sold of $60,000 = $35,000. Selling expenses are deducted after gross profit.

Beginning inventory is $60,000. Purchases of inventory during the year are $100,000. Cost of goods sold is $120,000. What is ending inventory?

$40,000 $60,000 + $100,000 - $120,000 = $40,000.

gross profit sales rev 330,000 accts recievable 53,000 ending inv 115,000 COGS 239,000 Sales returns 26,000

$65,000 sales rev - sales return- COGS 330,000 - 26,000- 239,000

Beginning inventory is $20,000. Purchases of inventory during the year are $100,000. Ending inventory is $50,000. What is cost of goods sold?

$70,000 $20,000 + $100,000 - $50,000 = $70,000.

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

Debit Inventory

How is income tax reported on a multiple-step income statement?

Separately after non-operating revenues and expenses

Meller purchases inventory on account. As a results, Meller's....

assets will increase.

manufacturing companies

companies that purchase raw materials from other companies and transform those raw materials into a finished product raw materials work in process finished goods

Merchandising Companies

companies that sell products that someone else has manufactured wholesaler retailer

Inventory Turnover Ratio

cost of goods sold ---------------------- average inventory

A periodic inventory system measures cost of goods sold by:

counting inventory at the end of the period.

Inventory is classified as...

current asset

LIFO provides better matching of ______

current revs with current inventory costs

FIFO is most closely approximayes the actual ______

physical flow of inventory

why would a company choose LIFO

primary benefit is tax saving results in higher COGS and lower profit on the income stmt compared to FIFO company owes less taxes

Costs related to manufacturing products typically include which of the following selling expense raw materials administrative expense overhead direct labor

raw materials overhead direct labor

cost (specific identification, FIFO or weighted-average)

report ending inventory at purchase sot

how to find gross profit

sales rev - sales returns- COGS

inventory sold FOB destination indicates that the...

sellers hold title until the inventory is received at the buyers location

a multiple-step income stmt provides the advantage of...

separating revs and exps based on their different types of activities

Which of the following methods are NOT used for inventory costing? Simple-average Weighted-average Specific identification LIFO NIFO FIFO

simple-average NIFO

the primary benefit of LIFO is...

tax savings lowering liability

Net Realizable Value (NRV)

the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation it's the net amount a company expects to realize in cash from the sale of the inventory.

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

which cost flow assumption generally results in the highest reported amount of net income in periods of rising inventory costs?

FIFO

Bernie Corp. uses the FIFO inventory method to calculate cost of goods sold for financial reporting purposes. Which of the following methods can Bernie use for tax purposes?

FIFO and weighted-average only

The cost of goods not yet sold is recorded in the ______ account, whereas the cost of goods that are sold to customers is recorded in ______.

Inventory; Cost of Goods Sold

The definition of inventory includes which of the following items? Items held for use or disposal Items held for resale Items currently in production for future sale Materials used currently in the production of goods to be sold

Items held for resale Items currently in production for future sale Materials used currently in the production of goods to be sold

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

Two Two entries are required: One entry is required for the sales transaction; a second entry is required to record the cost of goods sold and decrease inventory.

which best describes a merchandising company?

a company that purchases products that are primarily in finished form for resale to customers