accounting test 4 Flashcards
inventory
tangible resource that is held for resale in the normal course of operations
acquisition cost
inventory is Recorded at ________ cost
expense
Inventory becomes ____ when sold
gross profit
the amount of resources that are left to pay operating expenses (selling and administrative expenses) and provide for net income
perpetual
Cost of goods Sold updated with each sale
FOB shipping point
ownership of the inventory passes from seller to buyer at the shipping point and buyer pays and includes transportation costs termed as freight-in. Freight-in is included in the cost of inventor
FOB destination
ownership of the inventory passes from seller to buyer when goods are delivered. Seller pays transportation costs termed as freight-out. Freight-out is included as an expense on the seller’s income statement.
FOB destination
ownership of the inventory passes from seller to buyer when goods are delivered. Seller pays transportation costs termed as freight-out. Freight-out is included as an expense on the seller’s income statement.
FOB destination
ownership of the inventory passes from seller to buyer when goods are delivered. Seller pays transportation costs termed as freight-out. Freight-out is included as an expense on the seller’s income statement.
FOB destination
ownership of the inventory passes from seller to buyer when goods are delivered. Seller pays transportation costs termed as freight-out. Freight-out is included as an expense on the seller’s income statement.
Consigment
Goods owned by one party are held and offered for sale by another
2
In perpetual system, sales require ______ journal entries
One to recognize revenue *
One to recognize cost of goods sold and a reduction of inventory
What 2 transactions needed for sales in perpetual system
Restore inventory and decrease COGS *
Decrease A/R or cash and revenue
What 2 journal entries does returns and allowance require under perpetual
net method
returns and allowances liability is debited and A/R or Cash is credited
gross method
revenue account is debited and A/R or cash is credited
BI + p + EI
COGS equation
COGS - EI
COGAFS equation
Average cost equation
Total Extended Cost/Total Units = Average Cost per Unit
highest ending inventory, lowest COGS, highest income
in rising purchase prices FIFO produces
lowest ending inventory, highest COGS, and lowest income
in falling purchase prices FIFO produces
highest ending inventory, lowest COGS, and highest income
In falling purchase prices LIFO produces
FIFO
Inventory on the balance sheet and net income on the income statement are higher under
LIFO
Lower tax liability under
LIFO conformity rule
IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting
NRV of inventory equation
Estimated Selling Price - Costs of Disposal (Selling Costs)
NRV
WHen ______ of inventory is lower than its original cost, the valuation of inventory is adjusted down
NRV
____ is an example of conservatism
physically counted
ending inventory is unknown until
COGS Understated * EI Overstated * Net Income Overstated
understating beginning inventory leads to
- COGS Overstated * EI Understated* Net Income Understated
overstating beginning inventory leads to
Gross Profit Ratio
gross profit / net sales
Inventory Turnover Ratio
Cost of Goods Sold / Average Inventory
365 days / Inventory Turnover
Average days to sell inventory
operating assets
long-lived assets that are used by the company in the normal course of operations
Amortization
intangible assets are ______ expense
depletion
natural resources are _____ expense
straight line depreciation equation
(cost-residual value)/useful life
double declining balance method
more depreciation in early years of the asset’s life
different
Method chosen for taxes can be _______from the method used for F/S purposes
revenue expenditures
expensed on the income statement
revenue expenditures
Maintain the level of benefits provided by the asset, relate only to the current period, occur frequently, typically relatively small dollar amounts
revision of deprecation steps
Obtain the book value of the asset at the date of revision *
2. Compute depreciation expense using the revised amounts for book value, useful life, and/or residual value
impairment
Permanent decline in market value
write downs
FASB requires immediate recognition of
impairment
exists if future cash flows expected to be generated by the asset are less than the asset’s book value
Average Age of Fixed Assets
Accumulated Depreciation / Depreciation Expense
intangible assets
No physical substance *
Rights, privileges or competitive advantages *
Recorded at cost
intangible assets
No physical substance *
Rights, privileges or competitive advantages *
Recorded at cost
periodic system
records purchases into temporary account
formula for net purchases
purchases - returns and allowances - discounts + freight in
when legal title to the goods passes to the buyer
When Should Items Purchased Be Included in Ending Inventory?
opposite
Any error in ending inventory means the ___________error for Cost of Goods Sold (expense). Therefore, both the balance sheet and the income statement are impacted in the year of the error
Gross profit equation
Gross profit equation
periodic
Cost of Goods Sold are recorded only at the end of a period.
perpetual
Purchase price of the merchandise PLUS any cost of bringing the goods to sellable condition and location *
Inventory account represents the net cost of inventory that is on hand and ready to sell*
Historical Cost basis!
deprecation
PPE is an _____ expense
deprecation
PPE is an _____ expense
all expenses necessary to acquire and make an asset ready to use
Cost for PPE include
deprecation
Process of allocating to expense the cost of an asset over its useful life
straight line depreciation
Equal amount of depreciation expense each year
units of production method
Life of asset is expressed in terms of total units of production or activity
units of production equation
(Cost-Residual Value)/Expected Usage
full years
if the fixed asset is purchased (or disposed of) at the beginning or end of an accounting period, a _______ of deprecation is recorded
post acquisition expenditures
Ordinary repairs and maintenance, major overhauls, additions, improvements
capital expenditures
included in asset cost
capital expenditures
Increase future economic benefits in both current and future periods * Added to asset account and are subject to depreciation
earnings management
Companies delaying the timing of impairment recognition are practicing
write down transaction
loss on impairment
fixed asset
conservatism
write-down is consistent with ________________ principle
impairment
Measured as the difference between book value and fair value
steps in disposing assets
Update depreciation to date of disposal*
2. Compute the NBV at date of disposal*
3. Remove from the books by crediting the asset and debiting accumulated depreciation
Fixed Asset Turnover Ratio
Net Sales / Average NBV of Fixed Assets
Fixed Asset Turnover Ratio
Measures how efficiently company is using its fixed assets
natural resources
Generally only replaced or restored by an act of nature
depletion equation
Cost-Residual) / Recoverable Units
depletion * units recovered = depletion
depletion equation
Cost-Residual) / Recoverable Units
depletion * units recovered = depletion
cost flow assumption
perpetual record is kept both in units and dollars using a particular_____________________ throughout the accounting period.
Specific Identification
Assumption used where a small number of costly, distinctive items are sold
b. Appropriate for following types of inventory è cars, furniture, fur coats, jewelry
c. Cost flow does match physical flow of goods sold
matching
f the asset is purchased (or disposed of) during the accounting period, the __________________ principle requires that depreciation be recorded only for the portion of the year that the asset was used to generate revenue.
voluntary disposal
The disposal may occur at the end of the asset’s useful life or at some other time
involuntary disposal
l occurs when assets are lost or destroyed through theft, acts of nature, or by accident.
Gain on disposal
selling price greater than NBV
loss on disposal
selling price is less than NBV
journal entry for asset disposal
CASH
Accumulated depreciation
Asset
Gain/ Loss on sale
