Chapter 6: Inventory & Cost of Goods Sold
Does the purchaser or seller pay transportation costs in FOB shipping point?
purchaser
How is the sales discount "x/y, n/z " to be interpreted?
purchaser will receive an x% discount if they pay within y days, otherwise the normal balance is due in z days
How can companies manipulate their net income using LIFO?
By purchasing large quantities at the year's end to increase COGS, lower net income, and lower taxes
What account are beginning inventory, purchases, and ending inventory closed to under the periodic system?
COGS
What is the formula for calculating cost of goods sold?
COGS = beginning inventory + purchases - ending inventory
Under the average cost method, how is COGS calculated?
COGS = number of units sold X average cost per unit
What are the two inventory systems?
periodic and perpetual
Which inventory system is more commonly used?
perpetual
Which inventory system keeps a running total on all goods bought, sold, and on hand?
perpetual
Which inventory system uses bar codes?
perpetual
Under what inventory system is inventory counted at least once a year?
perpetual and periodic
What type of account is COGS?
Expense
What agency created the LIFO conformity rule?
FASB
What is the LIFO conformity rule?
If a company uses LIFO for tax purposes, it must use it for financial statements also
Which inventory method is best to use for low taxes with increasing prices?
LIFO
What is LIFO liquidation?
When a company using LIFO must use older inventory from the year before
How are ending inventory and COGS determined under the periodic inventory system?
a physical count at the end of the period
What is the principle of conservatism?
anticipate no gains but provide for all possible losses
How is the average cost per unit calculated?
average cost per unit = cost of goods available / number of units available
What are the three principles related to accounting for inventory?
consistency, disclosure, and conservatism
What type of accounts are sales discounts, returns, and allowances?
contra-revenue
How is the cost of goods available calculated?
cost of goods available = beginning inventory + purchases
Under LCM, if market cost is lower what is the journal entry required?
debit to COGS, credit to inventory
How is inventory costed under the specific unit inventory method?
each specific item is recorded at it's actual cost
Under the average cost method, how is ending inventory calculated?
ending inventory = number of units on hand X average cost per unit
What is the disclosure principle?
financial statements should disclose enough information for users to make informed decisions
How is gross profit calculated?
gross profit = sales revenue - cost of goods sold
How is gross profit percentage calculated?
gross profit percentage = gross profit / net sales = 1 - (COGS / net sales)
Is it better for inventory turnover to be low or high?
high
What does inventory turnover measure?
how quickly inventory is being sold
What is the lower of cost or market (LCM) principle?
inventory should always be reported at the lower of purchase cost or market
How is inventory turnover calculated?
inventory turnover = COGS / average inventory
What is FOB destination?
legal title passes to purchaser when goods arrive at purchaser's place of business
What is FOB shipping point?
legal title passes to purchaser when goods leave seller's place of business
What does the gross profit percentage represent?
markup or how much of every dollar is profit
What is the formula for net purchases?
net purchases = purchase price (including sales tax) + freight-in (shipping costs) - purchase returns, discounts, and allowances
What is the formula for net sales?
net sales = sales - sales returns, allowances, and discounts
Are consigned goods being held for another company part of the number of units in COGS?
no
Does IFRS allow LIFO?
no
Does the inventory method a business uses have to follow the physical flow of goods?
no
Is it practical for most businesses to use the specific unit inventory method?
no
How many entries are needed to record a sale under the periodic inventory system?
one
Which inventory system uses the temporary account purchases?
periodic
The cost of a good is all costs incurred to get it to ____ condition.
salable
Does the purchaser or seller pay transportation costs in FOB destination?
seller
What are the four inventory methods?
specific unit, average cost, FIFO, LIFO
What is the cost of inventory not sold by the end of the period?
the inventory on the balance sheet?
Under LIFO, which items are assumed to be sold first?
the most recently purchased items
Under FIFO, which items are assumed to be sold first?
the oldest items
How many entries are needed to record a sale under the perpetual inventory system?
two
What types of items is the specific unit inventory method used for?
unique items like automobiles, art, fine jewelry, etc.
What is the principle of consistency?
using the same accounting methods year to year to account for inventory
Are goods out on consignment part of the number of units in COGS?
yes
Are companies allowed to change inventory methods?
yes but they must disclose the effect on net income
