Financial Accounting Exam 4

The gain or loss is reported on the income statement as

"other revenues or gains" (Gains) or "other expenses and losses" (Losses)

Straight-Line Depreciation Method

A depreciation method that allocates an equal amount of an asset's cost to depreciation for each year of the asset's useful life. Calculated by diving the depreciable cost of an asset by the asset's useful life

Units of Production Depreciation Method

A depreciation method that allocates the cost of an asset over its expected life in direct proportion to the actual use of the asset

When a fixed asset is disposed of...

A gain or loss is recognized

Gross Profit Ratio

A measurement of the proportion of each sales dollar that is available to pay other expenses and provide profits for owners; it is computed by dividing gross margin by net sales

Impairment

A permanent decline in the future benefits or service potential of an asset

Inventory Turnover Ratio

A ratio that describes how quickly inventory is purchases (or produced) and sold. It is calculated as cost of goods sold divided by average inventory

Fixed Asset Turnover Ratio

A ratio that indicates how efficiently a company uses its fixed assets. This ratio is calculated by dividing net sales by average fixed assets

Average Age of Fixed Assets

A rough estimate of the age of fixed assets that can be computed by dividing accumulated depreciation by depreciation expense

FOB destination transportation costs are recorded as _______________

A selling expense on the income statement

Purchase Allowance

A situation in which the purchaser chooses to keep the merchandise if the seller is willing to grant a deduction form the purchase price

Voluntary Disposal

A type of disposal that occurs when a company determines that the asset is no longer useful; the disposal may occur at the end of the asset's useful life of at some other time

Involuntary Disposal

A type of disposal that occurs when assets are lost or destroyed through theft, acts of nature, or by accident

Declining Balance Depreciation Method

An accelerated depreciation method that produces a declining amount of depreciation expense each period by multiplying the declining book value by a constant depreciation rate

LCNRV is _______________

An application of the conservatism principle

Consignment

An arrangement where goods owned by one party are held and offered for sale by another

Depreciation is not

An attempt to measure fair value

In a perpetual system, sales requires ______________

An entry to record the sales revenue and an entry to recognize the expense associated with the decrease in inventory

Average Days to Sell Inventory

An estimate of the number of days it takes a company to sell its inventory. It is found by dividing 365 days by the inventory turnover ratio

Cost of Goods Sold (Cost of Sales)

An expense that represents the outflow of resources caused by the sale of inventory. This is often computed as the cost of goods available for sale less the cost of ending inventory

Specific Identification Method

An inventory costing method that determines the cost of ending inventory and the cost of goods sold based on the identification of the actual units sold and in inventory. This method does not require an assumption about the flow of costs but actually assigns cost based on the actual flow of inventory

First-In, First Out (FIFO) Method

An inventory costing system in which the earliest (oldest) purchases (the first in) are assumed to be the first sold (the first out) and the more recent purchases are ending inventory

Last-In, First-Out (LIFO)

An inventory costing system that allocates the cost of goods available for sale between ending inventory and cost of goods sold based on the assumption that the most recent purchases (the last in) are the first to be sold (the first out)

Perpetual Inventory System

An inventory system in which balances for inventory and cost of goods sold are continually (perpetually) updated with each sale or purchase of inventory. The accounts reflect the correct inventory and cost of goods sold balances throughout the period

Periodic Inventory System

An inventory system that records the cost of purchases as they occur, takes a physical count of the inventory at the end of the period, and applies the cost of goods sold model to determine the balances of ending inventory and cost of goods sold. The inventory account reflects the correct inventory balance only at the end of each accounting period

The cost of natural resources is

Any cost necessary to acquire and prepare the resource for separation form the earth

Cost

Any expenditure necessary to acquire the asset and the prepare the asset for use

The cost of a fixed asset is

Any expenditure necessary to acquire the asset and to prepare the asset for use. This amount is generally the cash paid

Intangible Operating Assets

Assets that provide benefit to a company over a number of years but lack physical substances. These are: patents, copyrights, trademarks, and good will

F.O.B. Destination

Means free on board until goods reach destination. This is a shipping arrangement in which ownership of inventory passes from the seller to the buyer at the destination (seller pays for shipping)

F.O.B. Shipping Point

Means free on board until shipping begins. This is a shipping arrangement in which ownerships of inventory passes from the seller to the buyer at the shipping point (buyer pays for shipping)

Merchandising companies only hold

Merchandise inventory

Retailers

Merchandisers that sell directly to consumers

Wholesalers

Merchandisers that sell to other retailers

Manufacturers

Companies that buy and transform raw materials into a finished product which is then sold

Merchandisers

Companies, either retailers or wholesalers, that purchase inventory in a finished condition and hold it for resale without further processing

If noncash consideration is involved

Cost is the fair value of the asset received or the fair value or the asset given up, whichever is more clearly determinable

Errors in measurement of ending inventory will affect

Cost of goods sold and net income for the next two periods

Three factors necessary to compute depreciation expense

Cost, useful life, and residual value

When purchase prices vary, FIFO LIFO and Average Cost will produce ________________________

Different amounts for ending inventory, cost of goods sold, and therefore income

FIFO LIFO and Average Cost allocate cost of goods available for sale between _______________

Ending inventory and cost of goods sold

Revenue expenditures are

Expenditures that do not increase the future benefit of an asset and are expensed as incurred

Revenue Expenditures

Expenditures that do not increase the future economic benefits of the asset. These expenditures are expenses as they are incurred

Capital Expenditures

Expenditures to acquire long term assets or extend the life, expand the productive capacity, increase the efficiency, or improve the quality of existing long term assets

Capital Expenditures

Extend the life of an asset. They are added to the asset account and are subject to depreciation

When prices are rising, ____ produces highest cost for ending inventory, lowest cost of goods sold, and highest gross margin (and net income)

FIFO

If NRV of inventory drops below its original cost

GAAP permit a departure from historical cost

Gross profit ratio and inventory turnover ratio measure ________________

How successful a company is at managing and controlling its inventory

When goods are purchased, the cost of the purchase is recorded _________

In inventory (for merchandisers) or raw materials inventory (for manufacturers)

In a perpetual inventory system, purchases of inventory are recorded by __________

Increasing the inventory account

Average Cost Method

Inventory costing method that allocates the cost of goods available for sale between ending inventory and cost of goods sold based on a weight average cost per unit

If the intangible asset has a finite life

It is amortized over the shorter of the economic or legal life of the asset

If the intangible asset has an indefinite life

It is not amortized but is reviewed at least annually for impairment

When prices are rising, ____ produces lowest cost for ending inventory, highest cost of goods sold, and therefore, lowest gross margin (and net income)

LIFO

LIFO results in lower income, so _________

Lower income taxes

Natural Resources

Resources, such as coal deposits, oil reserves, and mineral deposits, that are physically consumed as they are used by a company and that can generally be replaced or restored only by an act of nature

Organizational Costs

Significant costs such as legal fees, stock issue costs, accounting fees, and promotional fees that a company may incur when it is formed

FOB shipping point transportation costs are considered part of __________

The total costs of purchases so the inventory account is increased

Lower of Cost or Net Realizable Value (LCNRV) Rule

The value at which inventory is reported under GAAP, where cost is the historical cost of the inventory and net realizable value is the estimated selling price minus the costs of disposal

Book Value

The value of an asset or a liability as it appears on the balance sheet

Freight-In

Transportation costs that are normally paid by the buyer under FOB shipping point terms

Freight-Out

Transportation costs that the seller is usually responsible for paying under FOB destination terms

During production process, manufacturers record the cost in __________

Work-in-process, then transfer the cost to finished goods inventory when the product is complete

Depreciable Cost

Calculated as the cost of the asset less its residual value. This amount will be depreciated (expensed) over the asset's useful life

Depreciation is designed to

Capture the declining service potential of a fixed asset

If an item is returned, two entries must be made

One that decreases sales revenue and one that decreases cost of goods sold

Three categories of operating assets

PPE, intangible assets, natural resources

Purchase Discounts

Price reductions that companies offer their customers to encourage prompt payment

Inventory

Products held for resale that are classified as current assets on the balance sheet

Manufacturing companies have 3 types of inventory:

Raw materials, work-in-process, and finished goods

Work-in-Process Inventory

The account in manufacturing firms that consists of the raw materials that are used in production, as well as other production costs such as labor and utilities

Raw Materials Inventory

The account in manufacturing firms that includes the basic ingredients to make a product

Finished Goods Inventory

The account in manufacturing firms that represents the cost of the final product that is available for sale

Residual Value

The amount of cash or trade in consideration when an asset is retired

Depreciation Expense

The amount of depreciation recorded on the income statement

When an item is returned, the inventory item is reduced by ________

The amount of the return

Useful Life

The amount of time a company anticipates deriving benefit from the use of an asset

LIFO Reserve

The amount that inventory would increase (or decrease) if the company had used FIFO

As the service potential of the asset is used

The asset's cost is allocated as an expense (depreciation, amortization, or depletion)

The ending inventory of one period is

The beginning inventory of the next period

Once product is sold,

The cost is transferred out of the inventory account and into cost of goods sold

Research and Development Expense

The cost of internal development of intangible assets that is expensed as incurred

Purchases

The cost of merchandise acquired for resale during the accounting period

Purchase Return

The cost of merchandise returned to suppliers

The gain or loss is...

The difference between the proceeds from the sale and the book value of the asset

Impairment exists when

The future cash flows expected to be generated by an asset are less than the book value of the asset

Merchandise Inventory

The inventory held by merchandisers

Operating assets are

The long-lived assets used by the company in the normal course of operations to generate revenue

Depletion

The process of allocating the cost of a natural resource to each period in which the resource is removed from the earth

Depreciation is

The process of allocating the cost of a tangible fixed asset to expense over the asset's useful life

Amortization

The process whereby companies systematically allocate the cost of their intangible operating assets as an expense among the accounting periods in which the asset is used and the benefits are received

Discount Period

The reduced payment period associated with purchase discounts

If prices paid for inventory are stable, all inventory costing methods will yield _________________

The same amounts for ending inventory and cost of goods sold

Cost of Goods Available for Sale

The sum of the cost of beginning inventory and the cost of purchases

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since the asset was acquired. It is reported on the balance sheet as a contra asset