EXAM 2 LEARNSMART BUNDLE (CH4.6.7)
If a company where to ignore the fact that the market value of his inventory is lower than its cost then
It's assets and stockholders equity would be overstated
Corporations with high sales volume usually have
Low gross profit percentages
companies that sell goods they have produced
Manufacturing companies
Applying the lower of cost or market rule results in inventory being reported at the
Market value is lower than cost
if a companys adjusted income is 10000 and income tax is usually 20% then what is the net income
8000
what Effect does the inventory costing method have on the income statement
Cost of good sold, Gross profit, income from operations, income for for income tax expense, income tax expense and net income
Mini companies report or lower of cost or market write down expense as
Cost of goods sold
In a periodic system that in the period adjustment that adjust cost of good sold for the amount and ending inventory requires a _____to cost of good sold
Credit
in a perpetual system the entry to record the sale of merchandise to a customer on account would include a
D- Cost of goods sold D- accounts recievable C- sales revenue C-inventory
Days to sell measures the average number of
Days from the time inventory is purchased to the time it is sold
an adjustment entry that debits sales revenue and credit refund liability as well as debit inventory estimated for returns and credits cost of goods is recording the
Estimated returns
T/F gross profit is a stockholders equity account and is credited when goods are delivered to customers
F, it is a subtotal and found on the income statement
(TRUE OR FALSE) retained earnings is involved in the closing process it is considered as a temporary account
FALSE
When a company assumes that it's inventory cost flow out in the opposite order from which is a good were purchased it uses _______ to value it's inventory
FIFO
Inventory costing methods are based on assumptions that accountants make about the flow of inventory cost is what
FIFO LIFO
Example of merchandise inventory
Good held for sale in the normal course of business
Consignment inventory refers to
Good of a company is holding on behalf of the actual owner of goods. the company is willing to try to sell the goods for the owner for a fee
Which of the following is merchandise inventory
Goods held for sale in the normal course of business
When cost to purchase inventory are falling over time using LIFO leads to reporting ______ than FIFO
Higher inventory on the balance sheet
The assumption that a company makes about his inventory cost the flow can affect cost of goods sold on its ________ and inventory on its _______
Income statement balance sheet
Goals of inventory managers include
-making sure that inventory quality meets customer expectations -having enough inventory on hand to meet customer demand - keeping the cost of buying and storing inventory as low as possible
the adjustment to record inventory shrinkage will increase
cost of goods sold on income statement
Inventory consists of
costs needed to get the inventory ready for sale
for companies that generate net income during the current year will cause a net _____entry to retained earnings
credit
Accumulated depreciation has a normal _______ account. this means that it will _______ total assets
credit, decrease
supplies are ______inventory is an _______ intended to be __________
current assets, used
since the account represents a cost incurred on borrowed money it is called an _________ account
expense
Adjustments help to ensure that all ______ are recorded in the period in which they are incurred
expenses
Amortization is the concept that applies to the
expensing of long-term assets that lack physical substance over their useful lives
What does FIFO stand for?
first in first out
Merchandisers record revenue when they
fulfill their performance obligations by transferring control of the goods to customers
what is found on the income statement of a merchandiser
gross profit sales revenue cost of goods sold
As inventory quality increases, its cost usually
increases
purpose of recording an adjustment to wages and salaries is to record wages
incurred but not yet paid
The cost of borrowing money is called
interest
accounts payable is debited ______ creditied ______
is debited when owed amounts are repaid is credited when purchases are made on account
why is inventory reported as a current asset
it will be converted into cash within a year of the balance sheet date.
What does LIFO stand for?
last in first out
what are the effect of adjusting when using the accounting equation(A=L+SE)
liabilities will decrease SE will increase
interest not yet paid should be recorded as an expense AND a _____
liability
Net Sales on an income statement equals Sales Revenue
minus sales return, discounts, allowances
which line item is reported on both the income statement and statement of retained earnings
net income
gross profit equals
net sales - cost of goods sold
wheter purchase discounts are recorded using gross or net method , ultimately purchase discounts taken are
reductions to inventory
Whether purchase discounts are recorded using gross or net method, ultimately purchase discounts taken are
reductions to inverntory
net income is recorded in the retained earnings account when _____ and ______accounts are closed and trandferred into retained earnings
revenue, expense
adjusting entries endsure that
revenues recongnized and expenses inccured during the period are reflected on the income statement
deferred revenue reports
the amount collected in advance for which the seller has not fulfilled its obligations
the adjusted trial balance will be used to determine
the asset and liability balances on the balance sheet
the balance of retained earnings prior to the closing process equals
the balance at the end of the previous accounting period
the balance in retained earnings prior to the closing process equals
the balance at the end of the prvious accounting period
the equipment balance in companys ledger is equal to
the beginning balance
how does the adjustment of depreciation differ from other deferral adjustments
the depreciation adjustment uses a contra-account rather than reducing the assets directly
to calculate a company income tax obligation
the income tax (before tax) is multiplied by companys tax rate
When the bundle includes only products, this situation is easy to account for because the seller fulfills its performance obligations at
the same time
if sales return and allowances are a larger dollar amount relative to intial sales revenue it may mean
they are a product qualities issue
FOB destinantion means the goods are owned by the buyer as soon as
they arrive at the buyers place of business
the adjusting entry to record wages incurred but not yet recorded includes a credit to
wages payable
FOB shipping point
when ownership of goods transfers to a buyer as soon as the goods leave the sellers place of business
why is the balance in the depreciation expense account generally different form the balance of accumulated expense account
accumulated contains depreciation since the asset was purchased. depreciation only reflects the current
the buyers or merchanice with shipping terms FOB shipping point will...
add the transportation cost to its inventory account
Closing entries are recorded
after financial statements have been prepared
adjusting entries never affect the asset account is called
cash
deferral adjustments occurs when
cash has been exchanged in a prior transaction
accrual adjustments occurs when
cash has not been exchanged in prior transaction
deferred revenue is charged when
cash is collected in advance of the revenue
the step of the accounting where entries are recorded to updated retained earnings where the accounts have a zero balance is called the
closing process
Sales Returns and Allowances is a ________ account and is _______when goods are returned by customers for a refund
contra-revenue, debited
cost of goods sold on income statement reports the
cost X the quanitiy
And understatement of the 2018 ending inventory will affect
- 2019 beginning inventory - 2019 cost of goods sold - 2018 cost of goods sold
Which of the following would be considered inventory for a merchandiser
Accquired goods for resale
DELETE
DELETE
(TRUE OR FALSE) revenues, expenses, and dividends are considered temporary accounts
TRUE
The inventory costing methods determine
The amount of debit of cost of good sold in credit to inventory
Does FIFO perpetual and FIFO periodic inventory EQUAL?
YES
interest payable is
a liability on the balance sheet and exspresses how much is owed
a closing entry may include
credit to Wages Expense
in a perpetual system the entry to record the sale of merchandise includes a
debit to cost of goods sold
salaries and wages payable are
debited when the wages that are previously recorded are paid
sales transactions affect
income statement and balance sheet
Manufacturing company
makes the finished goods
which inventory system updates the inventory acount ONLY at the end of the accounting period
periodic
inventory system records a change in inventory account everytime goods are bought, sold, returned
perputal
How do temporary accounts differ from permanent accounts
temp accounts are closed at the end of the accounting period
which Inventory accounting methods are acceptable under US GAAP
- LIFO - Weighted average - specific identification - FIFO
What would explain an increase in a companies inventory turnover ratio
- a decrease in total inventory - an increase in the demand for the companys product
entries needed for the closing process
-Credit Dividends Declared and debit Retained Earnings - Debit each revenue, credit each expense, and record the difference in Retained Earnings.
The inventory costing method "Weighted average cost"
-adds together the total cost of all goods available for sale during the period -then divide that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory
If cost of acquiring inventory is rising LIFO will result in which of the following compared to FIFO
-cost of goods sold will be higher -Income tax expense will be lower -Gross profit will be lower
Gross profit is
-equal to net sales - cost of goods sold - A subtotal on the income statement
what income statement items are affected by the inventory method chosen
-income from operations - net income - income before tax expense - gross profit - income tax expense
The gross profit percentage measures the percentage of profit earned on each dollar of sales before deducting all expenses other than cost of goods the ratio is to:
1. Compare one company with another 2. Make comparisons over time
the expense recognition principle requires
an adjustment for income tax expenses owed attribute to the net income earned during that period
Specific Identification
an inventory method that tracks which item is actually sold in cost of goods sold for the actual cost of the item
perpetual updating formula
beginning Inventory + Purchases - Cost of Goods Sold = Ending Inventory
in a perpetual system the entry to record a purchase of merchandise on account includes a
credit to accounts payable debit to inventory
inventory is an _______ intended to be __________
current asset, sold
Which financial statements are needed to calculate the inventory turnover ratio
income statement and balance sheet
what type of adjusting entry to recorded last
income tax inferred
where are reports made to the public
- statement of cash flows - balance sheet- income sheet - notes to financial statement - statement of retained earnings
the defferred T- account will show what??
- the amounts the seller has fulfilled that were collected in advance on the debit side - the normal ending balance on the credit side - amounts recived in advance that seller hasnt fulfilled of its obligations on the credit side
perpetual inventory system
- updates inventory records every time an item is bought - provides the best inventory control because its continuous tracking of transactions allows companies to instantly determine the quantity of products on the shelves and to evaluate the amount of time they have spent there. - records all goods purchased and sold
In which ways does a periodic differ from perpetul system
1. Inventory is not updated until the end of the accounting period in the periodic system 2. Cost of goods sold is not updated until the end of the accounting period in the periodic system
what is reported on the income statement
1. sales revenue 2. cost of goods sold 3. gross profit
Goods in transit that have FOB shipping point should be included in the _______ inventory
Buyers
In a perpetual inventory system inventory is initially recorded at
Cost
Specific identification weighted average cost LIFO in the FIFO are generally accepted
Costing methods
First step when determining cost of good sold
Count the number of units on hand
After each selling merchandise to a customer both inventory and cost of goods sold are
Kept up-to-date in a perpetual system
How is the lower of cost or market rule applied when there are more than two types of inventory
Only the items that have market values lower than the cost will be written down
The _________ inventory system that records all inventory related transactions in the inventory account and reduces inventory at the time of sale
Periodic
The ________ inventory system as a separate account for these items and records cost of good sold at the end of the accounting period
Perpetual
Supplies should be ______ and Supplies Expense should be ______ for supplies used up during the period.
decrease, increase
supplies should _____ and supplies expense should _____ during the period
decrease, increase
prepayment for items such as rent are recorded as assets and later recorded as
expense
in an accrual adjustment for expenses incurred but not yet paid, a liability is
increased because cash will be paid in the future due to the expense incurred
the reason of recording an adjusted entry for salaries and wages is to record wages
incurred but not yet paid
in a perpetual system, the _______ account is debited when a company purchases merchandise on account
inventory
Goods in transit are
inventory items being transported from a seller to a buyer
what is true about post-closing trial balance
it is an internal report prepared as the last step of the accounting cycle
purpose of making an adjusted trial balance
to make sure total debits still equal total credits
effects of the financial condition of the business from the adjustment for revenues from the seller fulfilling its obligations that haven't been yet collected
total assets will increase and SE will increase
After the adjustments have been completed, the adjusted balance in the Interest Expense account represents
total interest that has been paid during the period
service company
will typically not put inventory on balance sheet or cost of goods sold on income statement
The inventory turnover ratio directly measures
The times per period the average inventory balance is sold
If ending inventory in year one is misstated than year ones _______also must misstated
Cost of good sold
Which of the following may occur with a higher inventory turnover ratio
- reduction in obsolescence - Reduction in inventory storage cost
items netted against sales revenue arrive at net sales
- sales returns - sales discounts - sales allowances
When will Accounts Receivable be involved in an adjusting entry?
REV is earned but not yet collected or recorded at the end of the period
wholesaler
buys goods and sells them to companies that will then sell them to individuals
FIFO is an
- An inventory costing method - Describes how to calculate the cost of goods sold
What might cause the value of inventory to fall below its original cost
- Damage - Increased competition - Obsolescence from going out of style
The rising unit costs rank
- FIFO - weighted average - LIFO
the adjusting entry to record amortization causes
- assets to decrease - SE to decrease
journal entry to record taking a discount when paying for goods previously purchased on account and recorded using the gross method includes
- debit to a liability account - credit to two assets accounts
To ensure the accuracy of inventory accounted for using the perpetual system physical counts
- detect bookkeeping errors - detect shrinkage - detect theft
which may require an accrual adjusting that's recorded with a debit to an expense and a credit to a liability
- interest owed on notes payable - utilities to be paid at a later date
In a periodic system the entry to transfer beginning inventory and net purchases to cost of goods sold includes a
1. Debit to cost of goods sold 2. Credit to purchases 3. Credit to inventory beginning
Find step revenue model for bundle sale
1. Identify the contract 2. Identify the sellers performance obligations 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations 5. Recognize revenue when each performance obligation is satisfied
The journal entry to record the payment within the discount. For goods previously purchased on account and recorded using the net method causes
1. Total assets to decrease 2. Total liabilities to decrease
The 3 effects of sales returns and allowances
1. are typically recorded after the intial sale when the actual return or allowances occur 2. are adjusted at the end of the accounting period for estimated returns and allowances exspected to occur in the following months 3. reduce the amount the seller exspects to recieve from the customers
Using a perpetual inventory system when a company records A sale of merchandise it must also record
A decrease in inventory Cost of goods sold, which will be reported on the income statement
Ending Inventory Equation
Beginning Inventory + Purchases - Cost of Goods Sold
FIFO perpetual formula
Beginning inventory+purchases =goods available for sale ——- goods available for sale - Cost of goods sold =ending inventory
The journal entry to record a write down of inventory from cost to it's lower market value includes a
Debit to cost of goods sold Credit to inventory
the adjusting entry to record depreciation includes a debit to_____ and credit to ________
Depreciation Expense Accumulated Depreciation
gross profit is calculated by
Net sales- cost of goods sold , THEN divide by net sales, THEN multiply by 100
To find a description of the inventory accounting method used by a company you need to look at the
Notes to the financial statement
The inventory methods apply to both
Perpetual and periodic inventory systems
The operating cycle is a series of activities at the company undertakes to generate _________ and ultimately cash
Revenue
Which line item would be found on a merchandisers income sheet and not on a service firms
Sales revenue, cost of goods sold
Good in transit that have terms FOB destination should be included in the _______ inventory
Sellers
True or false LIFO is not allowed by IFRS which makes comparisons of international companies with US companies difficult
True
Raw materials that have been moved into the production process become _________ inventory
Work in progress
what does the sales discount 2/10 , n/30 mean
You can take a 2% discount if you pay within 10 days, or the full amount is due within 30 days.
a journal entry to record the return of merchandise previously purchased on account was debiting inventory and crediting accounts payable what will happen to the entry
assets and liabilities will be overstated
the cost of goods sold equation
beginning inventory + purchases - ending inventory
Periodic Updating formula
beginning inventory + purchases - ending inventory = cost of goods sold
retailers
businesses that sell directly to individuals
In a periodic system that in the period adjustment to transfer beginning inventory and the cost of goods sold requires a ________ to cost of goods sold
debit
Using the gross method, the journal entry to record taking a discount when paying for goods previously purchased on account includes
decrease in assets/liabilities
entry to record the revenue recongnized from the service porption of a bundle sale that was collected in advance is recoreded with a debit to _____ and a credit to ______
defferred revenue, service revenue