Accounting Ch. 6&7

COGS equation

(COGAFS) - (Ending Inventory)

Inventory is record at

acquisition cost

The effect of recording depreciation for the year is a

decrease in assets and a decrease in net income

COGAFS equations

(beg. inventory) + (purchases) - (purchase returns & allowances) - (purchase discount)

What effects occur on a retail store's accounting equation when it records the purchase of merchandise on account, assuming the use of a perpetual inventory system.

Assets and Liabilities increase

Which event prompted the following journal entry made by Brown Company? October 15: Accounts Payable 4,000 Inventory 40 Cash 3,690

Brown paid for inventory purchased on credit, and took advantage of a 1% purchase discount

Goods owned by one party but held for sale by another

Consignment -original owner (consignor) retains ownership -seller (consignee) earns a fee for selling

If a company understates its inventory at the end of the period (ending inventory), what are the effects on cost of goods sold and net income for the current year?

Cost of Goods Sold will be overstated and Net Income will be understated

Two types of transportation shipping costs

FOB Shipping Point: Ownership of inventory transfers at shipping point (Freight-in, included in cost of inv.) FOB Destination: Ownership of inventory passes when goods are delivered (Freight-out, included as expense on seller's Income statement)

The amount of resources that are left to pay operating expenses and provide for net income is called

Gross Margin

Resources that are used in operations more than one year with no physical substance are called

Intangible Assets

When the market value of inventory items has declined below their cost, which method would be the most appropriate in complying with GAAP?

Lower of Cost or Market

Companies that buy and transform raw materials into a finished condition and hold it for resale without further processing are called _____________. They have at least three classifications of inventory:

Manufacturers a. Raw Material b. Work in Process c. Finished Goods

Two types of inventory systems

Perpetual : COGS updated with each sale (very expensive) Periodic: COGS recorded at the end of a period (less expensive)

Gross Margin = _____________ - _______________

Revenue - Cogs

If a company has average inventory of $18,750 and cost of goods sold is $150,000 which of these is true?

The company had an inventory turnover rate of 8 time

If the amount assigned to ending inventory is incorrect, then:

both the balance sheet and the income statement are affected

Accumulated Depreciation is a

contra asset (reduces assets)

Inventory becomes an _____________ when it is sold. The name of that expense is: ________________ or ___________ for short

expense, cost of goods sold or COGS

Companies that purchase inventory in a finished condition and hold it for resale without further processing are called _____________. Two examples of this type of companies are _____________ and ______________.

merchandisers, retailers, wholesalers

Transportation-in is, (Freight-in)

part of the cost of net purchases (included in cost of inventory) buyer pays and includes transportation cost

Pollet Company started business at the beginning of 2012. Pollet selected the FIFO method for its inventory costing. The profits will maximize for 2012 under this method, in a period of:

rising prices (Fifo = rising for max profit) (Lifo = falling is good)

The cost of goods sold is equal to:

the cost of goods available for sale less ending inventory

Copper Industries reported net income of $95,000 for 2012. Early in 2013, the company discovered an error was made in the inventory count and that its ending inventory for 2012 was overstated by $5,000. What is the effect of this error for 2012?

Assets and equity would have been overstated by $5,000 on this balance sheet; expenses would have been understated by $5,000 on the income statement, making net income overstated by $5,000

Transportation-out is, (Freight-out)

included as an expense on sellers income statement (seller pays shipping)

A tangible resource that is held for resale in the normal course of operations

inventory

At the year-end inventory count, if goods in transit are shipped FOB Shipping Point, they should be included in the inventory count of

the buyer

At the year-end inventory count, if goods in transit are shipped FOB shipping point, they should be included in the inventory of

the buyer

At the year-end inventory count, if goods in transit are shipped FOB Destination, they should be included in the inventory count of

the seller

The accounting life of intangible assets is determined by

their legal lives or useful lives, whichever is shorter