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Financial Accounting > CH 6 > Flashcards

CH 6 Flashcards

1
Q

What is inventory?

A

a. Items that a company intends for sale to customers.

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2
Q

What are merchandising companies?

A

a. Inventories that are primarily in finished form for resale to customers.
b. They don’t manufacture goods
c. They involve with process of moving inventory to end user, store.

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3
Q

Who are wholesalers?

A

a. Resell inventory to retail companies to processional users.
b. Don’t sell to general public but companies.

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4
Q

What are retailers?

A

a. Sell inventory to end users

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5
Q

What are manufacturing companies

A

a. Manufacture the inventories they sell, rather than buying them in finished form from supplies.

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6
Q

What are manufacturer’s three categories of inventory?

A

a. Raw materials
b. Work in process
c. Finished goods

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7
Q

What are raw materials?

A

a. Components of a finished product

b. Also called direct materials

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8
Q

What is working in process?

A

a. Products in production process that aren’t complete at end of period.

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9
Q

What is finished goods?

A

a. Inventory consists of items for which the manufacturing process is complete.

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10
Q

What makes up annual COG or cost of inventory( COI)?

A

a. Beginning inventory plus additional purchases

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11
Q

What is relationship between COI and COGS?

A

a. Add beginning inventory with purchases during the year
b. Beginning inventory plus purchases during the year equal total inventory available for sale.
c. Ending inventory( INS) (an asset) plus cost of good sold(COGS)( an expense)
d. INS is an asset while inventory sold is expense

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12
Q

What are the Inventory cost methods?

A

a. Specific identification
b. First in, first out(FIFO)
c. Last in, first out ( LIFO)
d. Weight-average cost

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13
Q

What is specific identification method?

A
  1. Matches each unit of inventory with its actual costs
  2. What is an example of specific identification method?
    a. Match an automobile’s serial number with invoice identifying the actual purchases price.
    i. Useful for special items.
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14
Q

Define three inventory cost flow assumption?

A

a. FIFO (First in first out)
b. LIFO ( last in first out)
c. Weighted average cost
i. They all assume a particular pattern

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15
Q

Describe last in, first out

A

a. Assumes last units of purchased are first ones sold to customers.

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16
Q

Describe weighted average cost method?

A

a. Assumes both cost of goods sold and ending inventory consist of random mixture of all the good available for sale.

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17
Q

Why is FIFO called the balance sheet approach?

A

a. The amount it reports for ending inventory

i. This appears on the balance sheet.

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18
Q

Why is LIFO called income statement approach?

A

a. The amount it reports for cost of good sold

i. This is reported on income statement

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19
Q

Why do company’s choose FIFO?

A

a. Most companies actual physical flow follows FIFO

i. Company sells oldest items first.

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20
Q

Rising costs can effect FIFO by

A

i. Higher ending inventory
ii. Lower cost of goods sold
iii. Higher reported profit than LIFO

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21
Q

Why Choose LIFO?

A

a. LIFO is tax savings
b. Lowest amount of profits ( inventory is rising)
i. Can benefit one’s tax return

22
Q

What is LIFO conformity rule?

A

a. IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting.

23
Q

What is perpetual inventory system?

A

a. A continual record of inventory purchased and sold

24
Q

What is periodic inventory system?

A

a. Periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand.

25
Q

What is LIFO adjustment?

A

a. A company’s own inventory records maintained on a FIFO basis to LIFO basis for preparing financial statements.

26
Q

How do you journalize a LIFO adjustment?

A

a. (DR) COGS
b. (CR) Inventory
c. (Record the LIFO adjustment)

27
Q

When should you reverse a LIFO adjustment?

A

a. When LIFO inventory is greater than FIFO

28
Q

What is Freight charges?

A

a. Shipping charges.

29
Q

What is FOB shipping point?

A

a. It means free on board shipping point
i. A title of ownership passes from the seller to the buyer.
ii. The title is passed to buyer when seller ships it.

30
Q

What does inventory FOB destination mean?

A

a. It does not transfer the title to the buyer when the inventory is shipped from the seller.
b. The buyer would not record the purchase until it reaches the end point.

31
Q

What is freight in?

A

a. Cost to transport inventory to the company which is included as part of inventory cost.

32
Q

Can you add the cost of freight in to the balance of inventory?

A

yes

33
Q

Can freight charges become part of the cost of good sold?

A

yes

34
Q

What is freight out?

A

a. Cost of freight on shipments to customers, which is included in the income statement either as part of cost of goods sold or as a selling expense.

35
Q

What is purchase discounts?

A

a. Allow buyers to trim a portion of the cost of the purchases in exchange for payment within a certain period of time.

36
Q

What is multiple-step income statement?

A

a. An income statement that reports multiple levels of income.

37
Q

What is a gross profit?

A

he difference between sales revenue and cost of goods sold.

38
Q

What are operating expenses?

A

a. Salaries, utilities, advertising, supplies, rent, insurance, and bad debts

39
Q

. What is operating income?

A

a. Profitability from normal operations that equals gross profit less operating expenses.
b. It measures profitability from normal operations.

40
Q

What are nonoperating revenues and expenses?

A

a. Interest revenue

b. Interest expenses

41
Q

What is income before income taxes?

A

a. Operating income plus non-operating revenues less non-operating expenses.

42
Q

What is net income?

A

a. Difference between all revenues and all expenses for the period.

43
Q

What consist a multiple step income statement?

A

a. Sales revenue
b. COGS
c. Gross profit
d. Selling expenses
e. General and administrative expenses
f. Operating income
g. Non-operating reveneues
h. Non-operating expenses
i. Income before income taxes
j. Income tax expense
k. Net income

44
Q

What is replacement cost?

A

a. Cost to replace an inventory item in its identical form

45
Q

What is lower of cost or market method?

A

a. Method where companies report inventory in the balance sheet at the lower of cost or market value, where market value equals replacement cost

46
Q

How do you journalize LCM?

A

a. (Dr) COGS
b. (Cr) inventory
c. (adjust inventory down to market value)

47
Q

How do you analyze management of inventory?

A

a. Inventory turnover ratio

b. Average days in inventory

48
Q

What is inventory turnover ratio?

A

a. The number of times a firm sells its average inventory balance during a reporting period. It equals cost of goods sold divided by average inventory.
b. COGS/average inventory

49
Q

What is average days in inventory?

A

a. Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.
b. 365/inventory turnover ratio

50
Q

What is gross profit ratio?

A

a. Measure of the amount by which the sale price of inventory exceeds its cost per dollar sales. It equals gross profit divided by net sales
b. Gross profit/net sales

Financial Accounting (11 decks)

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