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Question 1

What is inventory classified as on the balance sheet?

Answer 1

Inventory is a current asset.

Question 2

What are the steps in the operating cycle for a merchandiser?

Answer 2

(a) Purchase merchandise
(b) Place in inventory for sale
(c) Sell on credit
(d) Create accounts receivable (current asset)
(e) Collect payment

Question 3

What is the formula for calculating Cost of Goods Sold (COGS)?

Answer 3

Beginning inventory + purchases - ending inventory

Question 4

What is the formula for calculating goods available for sale?

Answer 4

Beginning inventory + Net purchases = goods available for sale

Question 5

What is another formula for goods available for sale?

Answer 5

Cost of goods sold + Ending inventory = goods available for sale

Question 6

How do companies using the perpetual inventory system record COGS?

Answer 6

They record the cost of goods sold at the time of each sale.

Question 7

How do companies using the periodic inventory system record COGS?

Answer 7

They record cost of goods sold at the end of the period.

Question 8

What is the formula for calculating gross profit?

Answer 8

GROSS PROFIT = SALES - COGS

Example: If sales are $10,000 and COGS is $6,000, then gross profit is $4,000.