Accounting ch. 5 and 6

Gross Profit Rate

*gross progfit / net sales (sales revenue - cogs) / sales revenue (net sales - cogs) / net sales

Days in inventory

365 / average inventory

contra revenue account

An account that is offset against a revenue account on the income statement.

Flow of Costs

Beginning Inventory + Net purchases = Goods Available for sale - Ending Inventory = Cost of Goods Sold

Ending inventory is $10,000, beginning inventory is $20,000, and the cost of goods purchased is $25,000. How much is cost of goods sold?

Beginning balance ($20,000) plus purchases ($25,000) equals $45,000 in merchandise available, less ending inventory ($10,000) equals cost of goods sold of $35,000.

ending inventory

Beginning inventory plus purchases equals..

weighted-average unit cost

COGAS / total units available for sale

Inventory turnover

COGS / average inventory

LIFO reserve

Difference between inventory using LIFO and inventory using FIFO

multi step income statement

Highlights the components of net income. Three important line items: gross profit, income from operations, and net income.

What merchandising account will appear in the post-closing trial balance?

Inventory

Just-in-time (JIT) inventory

Inventory system in which companies manufacture or purchase goods just in time for use.

Net income is $15,000, operating expenses are $20,000, net sales total $75,000, and sales revenues total $95,000. How much is the profit margin?

Net income ($15,000) divided by net sales ($75,000) equals profit margin of 20%.

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is the gross profit rate?

Net income ($15,000) plus operating expenses ($20,000) equals a gross profit of $35,000. The gross profit of $35,000 divided by net sales of $75,000 = gross profit ratio of 46.7%.

Phantom Profit

Purchases LIFO $11 x 200 $12 x 300 $13 x 240 FIFO $11 x 200 $12 x 300 $13 x 240 Cost of goods available for sale $ 8,920 Less: Ending inventory $ 3,160 $3,600(fifo) Cost of goods sold $5,760 $5,320(fifo) *(200 x $11) + (80 x $12) = $3,160 **(240 x $13) + (40 x $12) = $3,600 Phantom Profit = $5,760 - $5,320 = $440

Income Measurement

Sales revenue - Cost of Goods Sold {not used in service business} = Gross Profit {not used in service business} - Operating Expenses = Net Income (loss)

Gross Profit

Sales revenue - cost of goods sold

single step income statement

Subtract total expenses from total revenues Two reasons for using the _____-step format: 1. Company does not realize any type of profit or income until total revenues exceed total expenses. 2.Form is simple and easy to read.

Work in process

That portion of manufactured inventory that has begun the production process but is not yet complete.

Describe the LIFO reserve and explain its importance for comparing results of different companies.

The ____ ______represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies this difference can be significant, and ignoring it can lead to inappropriate conclusions when using the current ratio or inventory turnover.

When using a periodic inventory system and the purchaser directly incurs the freight costs, which account is debited?

When the purchaser directly incurs the freight costs and is using a periodic inventory system, Freight-in is debited.

current ratio

current assets / current liabilities

Net sales are $2,000,000, cost of goods sold is $960,000, and average inventory is $30,000. How many days sales are in inventory?

days sales in inventory is calculated as 365 days divided by inventory turnover. Inventory turnover = $960,000 / $30,000 = 32 times Days sales in inventory = 365 / 32 = 11.4 days

COGAS=

equal the beginning inventory + purchases - purchases discounts and purchases returns and allowances + freight-in:

operating expense

gross profit - net income

FOB destination

is a contraction of the term "Free on Board ______." The term means that the buyer takes delivery of goods being shipped to it by a supplier once the goods arrive at the buyer's receiving dock. Ownership of the goods remains with the seller until the goods reach the buyer.

Freight-in

is the transportation cost associated with the delivery of goods from a supplier to the receiving entity.

operating expenses

net income - gross profit

Profit Margin

net income / net sales

Sales Revenue

net sales + sales returns and allowances

merchandising company

one classification : __________ inventory

manufacturing company

three classifications: raw materials, work in progress, and finished goods

Net Income

total revenue - total expenses

Periodic

a ______ method is an accounting method in which the amount of inventory is determined at the end of each accounting period or in specified periods.

Purchase allowance

is a reduction in the buyer's cost of merchandise that it had purchased. The _____ ______ is granted by the supplier because of a problem such as shipping the wrong items, the incorrect quantity, flaws in the goods, etc.

FOB shipping point

is a contraction of the term "Free on Board __________." The term means that the buyer takes delivery of goods being shipped to it by a supplier once the goods leave the supplier's shipping dock. Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

Freight-out

is the transportation cost associated with the delivery of goods from a supplier to its customers. This cost should be charged to expense as incurred and recorded within the cost of goods sold classification on the income statement.

Specific identification method

An actual physical-flow costing method in which particular items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory.

Average-cost method

An inventory costing method that uses the weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold. Consigned goods Goods held for sale by one party although ownership of the goods is retained by another party.

Periodic inventory system

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.

Weighted-average unit cost

Average cost that is ______ by the number of units purchased at each unit cost.

2/10, n/30

DEFINITION of '2%/10 net 30' A way of providing cash discounts on purchases. It means that if the bill is paid within 10 days, there is a 2% discount. Otherwise, the total amount is due within 30 days.

Merchandising firms usually classify their inventory into raw materials, work in process and finished goods. True or False?

False. Manufacturers, not merchandisers usually classify their inventory as raw materials, work in process and finished goods.

A company has the following accounts balances: Sales revenue $2,000,000; Sales Returns and Allowances $250,000; Sales Discounts $50,000; and Cost of Goods Sold $1,275,000. How much is the gross profit rate?

Gross profit divided by net sales results in a gross profit rate of 25%. Net sales = $2,000,000 ‒ $250,000 ‒ $50,000 = $1,700,000 Gross profit = $1,700,000 ‒ $1,275,000 = $425,000 Gross profit rate = $425,000/$1,700,000 = 25%

Purchase returns

or returns outwards, are a normal part of business. Goods may be returned to supplier if they carry defects or if they are not according to the specifications of the buyer.

Perpetual inventory system

A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.

Quality of earnings ratio

A measure used to indicate the extent to which a company's earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income. less than 1: more aggressive more than 1: conservative

Perpetual

A method of accounting for inventory that records the sale or purchase of inventory in near real-time, through the use of computerized point-of-sale and enterprise asset management systems.

lower-of-cost-or-market value

Companies use the ____________ basis when the current replacement cost (market) is less than cost. Under _____, companies recognize the loss in the period in which the price decline occurs.

When the terms of a sale are FOB destination, legal title to the goods passes to the buyer when the goods reach the buyer's place of business. True or False?

True. Sales terms of FOB destination indicate that the seller holds title until the goods reach the destination.

If a company's net cash provided by operating activities is $4,250,000 and its net income is $3,465,000 then its quality of earnings ratio is 1.23. True or False?

True. The quality of earnings ratio is net cash provided by operating activities divided by net income ($4,250,000 / $3,456,000 = 1.23).