Chapter #5

Question 1

what is an operating cycle

Answer 1

a series of activites that describe how a company takes casha nd turns it into more cash

Question 2

what kind of items are considered as inventory

Answer 2

only items that a firm sells

Question 3

what financial statement does the value of inventoy affect

Answer 3

balance sheet

income statement

Question 4

when is the purchase of inventory recorded

Answer 4

not when ordered but when inventory received

Question 5

two ways to record inventory transactions

Answer 5

perpetual inventory system

periodic inventory system

Question 6

perpetual inventory system

Answer 6

firm updates inventory accounting records every time when inventory is purchased, sold, and returned

Question 7

periodic inventory system

Answer 7

updating inventory account only at the end of a period

missing inventory is considered as sold - cost will be included as costs of goods sold expense

Question 8

what does the cost of inventory include

Answer 8

all costs to obtain merch and get it ready for sell

e.g. shipping costs

Question 9

different shipping terms between buyer and vendor

Answer 9

FOB shipping point

FOB destination

Question 10

FOB shipping point

Answer 10

buying firm pays shipping costs
amount is called freight-in -> included in inventory
buyer responsible for inventory from vendor´s warehouse on

Question 11

FOB destination

Answer 11

vendor pays shipping costs
buyer has no freight-in costs
vendor responsible for inventory until it reaches buyer

Question 12

what is a transaction called when firm returns goods to a vendor

Answer 12

purchase return

Question 13

in accounting system where will purchase return be noted

Answer 13

deducted from cost of inventory

reduction in accounts payable

Question 14

purchase allowance

Answer 14

when goods are damaged but kept within a firm, but reduction of purchase price

Question 15

purchase discount

Answer 15

reduction in price of inventory purchase for prompt payment

Question 16

example of purchase discount

Answer 16

2/10, n/30 ->2% discount if buyer pays within 10 days entire purchase price, if not full amount is within 30 days

Question 17

how is transaction recorded when purchse discounts were used

Answer 17

full amount as reduction in accounts payable
decrease in cash
decrease in inventory of amount saved

Question 18

cost of goods available for sale

Answer 18

total of beginning inventory + net purchases made during period

Question 19

sales and returns allowance

Answer 19

account with amounts that reduce sales due to customer resturns or allowances for damaged merch
deducted from sales revenue for income statement

Question 20

what is sales and return allowance an example for

Answer 20

contra-revenue

Question 21

what is a return of a good from a customer recorded as

Answer 21

decrease in accounts receivable

decrease in sakes return and allowances (S/E)

Question 22

sales discount

Answer 22

reduction in the sales price offered to customer for prompt payment

Question 23

where is sales discount recorded in an income statement

Answer 23

deducted from revenue sales

Question 24

what does a company need to collect in additon to sales revenue

Answer 24

sales tax

Question 25

advantage of a perpetual inventory system

Answer 25

inventory shrinkage can be recorded - stolen, damaged or lost inventory

Question 26

what is an inventory cost flow assumption used for

Answer 26

to calculate cost of good sold for income statement and cost of ending inventory for balance sheet
determine how $ of cost of goods available for sale is devided into cost of goods sold and ending inventory

Question 27

what are the different inventory cost flow assumptions

Answer 27

specific identification
weighted average cost
First-in, first-out (FIFO)
Last-in, first-out (LIFO)

Question 28

specific identification method

Answer 28

inventory cost flow method

keeps track of actual cost of specific goods sold because firm records cost of goods sold

Question 29

weighted average coast method

Answer 29

inventory cost flow method
average cost of goods available for sale is used to calculate cost of goods sold and ending inventory
calculation of average unit cost -> applied to all units sold = cost of goods sold, average number -> applied to all units remaining = value of ending inventory

Question 30

First-in, First-out (FIFO)

Answer 30

inventory cost flow method

first items purchased are the first ones sold

Question 31

Last-in, first-out (LIFO)

Answer 31

inventory cost flow method

last items purchased are the first ones sold

Question 32

what is important to understand regardless of the inventory cost flow method

Answer 32

no matter which method, cost of goods available for sale is the same

Question 33

when does FIFO result in a higher net income

Answer 33

only in period of increasing inventory cost

Question 34

in what kind of financial statement are income taxes included

Answer 34

statement of cash flow

Question 35

disadvantage of using LIFO

Answer 35

lowest net income

Question 36

which income statement has the highest deduction by income taxes

Answer 36

the one formed with FIFO

Question 37

how do firms use an inventory cost flow method

Answer 37

compatibility with similar companies
maximize tax savings and cash flow
maximize net income

Question 38

which inventory cost flow method produces the largest net cash flow from operating activities

Answer 38

LIFO

Question 39

lower-of-cost-of-market rule (LCM)

Answer 39

use of lower either cost or market value of inventory for a financial statement

Question 40

gross profit/margin ratio

Answer 40

sales - cost of goods sold (gross profi)/sales
measures firm´s performance
portion of sales dollar a company has left after paying for cost of goods sold

Question 41

inventory turnover ratio

Answer 41

cost of goods sold/(beginning inventory - ending inventory) /2
measures how many times a firm turns over its inventory during a year