Accounting Ch6 Review
The period-end adjustment in a periodic inventory system serves the purposes: 1. 2. 3.
1. Close purchase-related temporary accounts 2. Adjust the inventory balance to its proper ending balance 3. Record COGS for the period
What account is used to record a purchase of inventory for each of the following methods? 1. Perpetual Method 2. Periodic Method
1. Inventory 2. Purchases
Average days in inventory formula
365/inventory turnover ratio
In the perpetual inventory system, what is the effect of a sale of inventory on assets
Assets increase by the sales price of the inventory and decrease by the cost of the inventory
Cost of goods available for sale formula
BI + Net Purchases =
Inventory turnover ratio formula
COGS/Avg. Inventory
COGS formula
Cost of goods avail. for sale - EI
Weighted average formula
Cost of goods available for sale/number of units
Earn a purchase discount on a credit purchase entry
Debit AP (total amount without discount) Credit Inventory (for discount amount) Credit Cash (total amount without discount - discount)
Entries to sell inventory on account
Debit AR Credit Sales Debit COGS Credit Inventory
Entries for selling inventory
Debit AR/Cash, Credit Sales Rev Debit COGS, Credit Inventory
If you purchase inventory and record the entry in a purchase account, then pay the amount within a 10 day period for a 2% discount, what is debited/credit?
Debit Accounts Payable $100 Credit Purchase Discounts $2
Entry to write something down to the market value
Debit COGS Credit Inventory
Year-end adjustment using lower of cost and NRV: If the cost is more than the NRV, what is the adjustment like? If the cost is less than the NRV, is any adjustment needed?
Debit COGs, Credit Inventory (for the difference) No
Entry to purchase inventory on account
Debit Inventory Credit AP
When costs are rising, FIFO/LIFO shows the lower COGS and a higher net income
FIFO
Gross profit ratio formula
Gross profit/Net sales
For the year, Sealy Incorporated reports net sales of $50,000, cost of goods sold of $40,000, and an average inventory balance of $5,000. What is Sealy's gross profit ratio?
Gross profit/net sales = 10000/50000 = 20%
When costs are rising, FIFO/LIFO leads to a lower net income
LIFO
_______ provides a better matching of current revenues with current inventory cost
LIFO
The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company using LIFO is referred to as the _____ _________
LIFO reserve
Gross profit formula
Net sales - COGS
Are land improvements added to the cost of the land?
No, they are in separate land improvements accounts
Overstating ending inventory affects net income and COGs by? Why is net income affected?
Overstatement of Net income Understatement of COGS Because COGS is an expense that affects net income
Gross Profit Formula
Sales - COGS
Inventory Costing Methods
Specific Identification FIFO LIFO Weighted-avg cost
The inventory costing method that matches each unit of inventory with its actual cost
Specific identification
The adjustment to write down inventory to market value would include:
a credit to inventory a debit to COGS (Both are for the different in cost and NRV)
Using a periodic inventory system, the sale of inventory on account would be recorded as: a. Debit Cost of Goods Sold; credit Inventory. b. Debit Inventory; credit Sales Revenue. c. Debit Sales Revenue; credit Accounts Receivable. d. Debit Inventory; credit Accounts Receivable.
a. Debit COGs, credit Inventory
Which inventory cost flow assumption generally results in the lowest reported amount for inventory when inventory costs are rising? a. Specific identification. b. First-in, first-out (FIFO). c. Last-in, first-out (LIFO). d. Average cost.
c. LIFO Don't forget that LIFO leaves behind the lowest ending inventory
In a periodic inventory system, purchase returns are recorded in _______ ________ accounts
contra-purchases
Inventory is a current/noncurrent asset
current
Which of the following levels of profitability in a multiple-step income statement represents all revenues less all expenses? a. Gross profit. b. Operating income. c. Income before income taxes. d. Net income.
d. Net income
In a periodic inventory system, shipping costs for purchased goods are debited/credited to a __________ account
debited; freight-in
Inventory errors that are discovered more than one accounting period after the error occurred
do not require a correcting entry because the error self-corrects
When inventory is sold, the cost of inventory is recognized as an ________
expense
FOB stands for
free on board
In times of rising prices, ending inventory using LIFO will be higher/lower than that of FIFO
lower (the more expensive units are used in LIFO, leaving the least expensive ones behind in EI)
NRV is also referred to as the _________ value
market
On a multi-step income statement, the category of revenues and expenses reported immediately after operating income is referred to as ___________ revenues and expenses
nonoperating
Specific identification is only ever used for ___________ and very ______________ products
unique; expensive
