Accounting for Decision Making Test 1
FOB destination point
Seller incurs transportation costs:
revenue - COGS = gross profit gross profit - S&A exp. = operating inc operating inc + other rev or exp = inc bf IT inc bf IT - IT = net income
Setup of an Income Statement:
Relevance
The capacity of information to make a difference in a decision
goods available for sale less ending inventory
The cost of goods sold is:
finished goods inventory
The inventory account a manufacturer uses to record the cost of products completed and available for sale is called:
Materiality
The magnitude of an accounting information omission or misstatement that will affect the judgement of someone relying on the information
Conservatism
The practice of using the least optimistic estimate when to estimate amounts are equally likely
Understandability
The quality of accounting information that makes it comprehensible to those willing to spend the necessary time
Faithful Representation
The quality of information that makes it complete, neutral, and free from error
Travella Co. applies the same accounting principles each accounting period
Travella Co. applies the consistency convention. What does this mean?
both the balance sheet and the income statement are affected
If the amount assigned to ending inventory is incorrect:
an integral part of the calculation of cost of goods sold
In a periodic inventory system, the cost of purchases is recognized as:
both the periodic and perpetual inventory system
In order to determine inventory for its balance sheet, it is best for a company to count the inventory at the end of its accounting period for:
comparison with its current ratio for the current year
Lottony Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10% since last year. Which of the following would be the least useful comparison in evaluating the drop in Lottony's profit margin?
cost/benefit
Many companies assign only the net invoice price for merchandise to inventory and cost of goods sold. All other costs, including transportation and other costs of bringing merchandise to the place of business, are charged to the expense of the period in which they were incurred. Which accounting principle or concept is applied in this example?
sales - sales returns and allowances - sales discounts
Net sales formula:
merchandise inventory
Which would not be found in the assets on the balance sheet of a manufacturer?
COGS / average inventory
Inventory turnover ratio formula:
current assets - current liabilities
Working capital formula:
part of cost of goods purchased
Transportation-in is:
replacement cost
Which method of inventory costing is not acceptable for financial accounting purposes?
Consistency
For accounting information, the quality that allows a user to compare two or more accounting periods for a single company
Comparability
For accounting information, the quality that allows a user to compare two or more companies and look for similarities and differences
income statement and statement of retained earnings
Forman, Inc. earned $600,000 profit during 2016. On which financial statement(s) will you find the dollar amount of the profit earned by the company?
gross profit / net sales
Gross profit ratio formula:
current assets
How are assets which are expected to be realied in cash, sold, or consumed within the normal operating cycle of a business or within one year reported on a classified balance sheet?
in contra accounts to the purchases account
How are purchase discounts and purchase returns recorded by a company using the periodic inventory system?
FOB shipping point
Buyer incurs transportation costs:
net sales - COGS
Gross profit formula:
write-down of inventory can be reversed in later periods under U.S. GAAP
All of the following statements are true except:
no net effect
Blenham Inc. sells merchandise on credit. If a customer pays their balance due after the discount period ends, what is the effect of the payment on Blenham's accounting equation?
operating, investing, and financing activities
Business entities generally carry on:
cost of goods available for sale - ending inventory
COGS formula:
beg inventory + cost of goods purchased
Cost of goods available for sale formula:
current assets / current liabilities
Current ratio formula:
current ratio
Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the company's short-run liquidity, which measure should be used?
current assets minus current liabilities
What is the correct method for calculating working capital?
weighted average cost x # of units in ending inventory
What is the formula for ending inventory using weighted average cost?
cost of goods available for sale/units available for sale
What is the formula for weighted average cost?
to provide useful information for decision making
What is the primary objective of financial reporting?
LIFO for tax reporting and FIFO for financial reporting
What situation is not allowed by federal income tax rules?
FIFO
Which inventory costing method results in the lowest income tax expense during a period of decreasing prices?
recievables
Which is not a major category for long-term assets?
LIFO
Which method might allow a company to make significant inventory purchases at year end for the purpose of manipulating income?
to help the users reach their decision in an informed manner
Which of the following is the best description of the purpose of financial reporting?
the lower of cost or market method is an exception to the historical cost principle
Which of the following statements regarding the application of lower cost or market method is true?