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Accounting 1 > chapter 5 - 8 > Flashcards

chapter 5 - 8 Flashcards

1
Q

merchandising companies have 2 categories

A
  1. cost of goods sold

2. operating expenses

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2
Q

why are the operating cycle of merchandising companies longer than service companies?

A

because of inventory

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3
Q

the flow of cost for merchandising companies is as follows

A

beginning inventory + cost of goods purchased = cost of goods available

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4
Q

what 2 systems do companies use to account for inventory

A
  1. perpetual

2. periodic

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5
Q

perpetual inventory

A

keeping records of each inventory purchase and sale. showing instantly the inventory that should be on hand for every item. CAR COMPANIES and is better than periodic

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6
Q

periodic inventory

A

determining the cost of goods sold only at the END OF THE ACCOUNTING PERIOD.

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7
Q

true or false, the primary source of revenue for a merchandising company is performing services for customers

A

false!

merchandise is the primary source of revenue.

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8
Q

In what account do we record PURCHASES OF MERCHANDISE (for sale)?

also what’s the normal balance on that act?

A

Inventory account, debit balance.

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9
Q

when you see SALES agreement what should you immediately think

A

think : who is paying for transport, the buyer or seller

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10
Q

FOB shipping think

A

shipping = buyer pays

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11
Q

FOB destination think

A

destination = seller pays

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12
Q

FOB shipping cost

A

goes to the BUYER! and he records it in

inventory cost as a debit, and credits cash

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13
Q

FOB destination cost

A

Goes to the SELLER! and she records it in

freight out ( delivery expense) as debit, and credit cash

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14
Q

Purchase return

A

returning goods for whatever reason for cash or credit

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15
Q

Purchase allowance

A

example: Keeping my peck deck since the gave me a DEDUCTION in the price

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16
Q

what happens when a company keeps goods if granted a 50 dollar allowance?

A

debit accounts payable by 50 (reduce)

credit inventory by 50 (increase)

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17
Q

when you see credit terms think

A

one: how much cash is discounted
and when the discount is offered
two: when does the buyer have to pay the full
amount

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18
Q

explain the credit term: two-ten, net thirty

A

buyer gets a 2 % cash discount, after subtracting any returns or allowances
under 1 condition; the payment is made with in 10 days of the “invoice date” (discount period) otherwise the full amount is due in 30 days

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19
Q

explain the credit term 1/10 EOM

A

This means a 1% discount is available if the invoice is paid within the 1st 10 days of the next month

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20
Q

explain the credit term n/30, n/60, n/10 EOM

A

THIS MEANS THERE IS NO DISCOUNT!

buyer has 30, 60, or within the first 10 days of the next month

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21
Q

why does the amount of the discount decrease inventory when a buyer pays an invoice within the discount period?

A

because companies recognize inventory as a cost so by paying within the discount period the buy is actually reducing cost!

reduce (credit) inventory
Reduce or (credit) cash by the net amount owed. (less the discount)
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22
Q

The seller makes 2 entries for each sale, what are the 2 entries?

A
  1. record the SALE : seller will debit cash or accounts receivable if its a credit sale and then credits sales revenue
  2. record COST of merchandise sold: seller debits (increases) cost of goods sold and Credits ( decreases) inventory for the same amount
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23
Q

How do we record credit for returned goods?

sales returns and allowances

A
  1. debit sales returns and allowances (contra act of revenues)
    1a. decrease (credit) accounts receivable at the selling price.
  2. debit inventory
    2a. credit cost of goods sold
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24
Q

example: if he returned goods were defective and had a fair value of 50$, what do you credit and debit?

A

Credit cost of goods sold 50$

debit inventory 50$

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25
Q

example: if he takes an allowance for goods that were defective, what do you credit and debit?

A

seller debits sales returns and allowances

and credits accounts receivable for the AMOUNT OF THE ALLOWANCE.

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26
Q

true or false sales account and allowance are contra revenue accounts to Sales Revenue

A

TRUE!

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27
Q

true or false, the normal balance of sales returns and allowances are credit

A

False, the normal balance for returns and allowance is a debit, with a D!!!

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28
Q

sales discounts are

A

Contra accounts to sales revenue and has a DEBIT balance

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29
Q

companies use 2 forms of income statements

A
  1. single step income statement like from chapter 1 -4

2. multi step income statement, highlights the components of net income

30
Q

The multi step income statement has 3 lines of items, what are they?

A
  1. gross profit
  2. income from operations
  3. net income
31
Q

The multi step income statement has 3 steps, what are they?

A
  1. subtract cogs from N__ S___ =to determine G.P.
  2. subtract O___. exp. from G.P. to determine Income from operations.
  3. add or subtract the results of activities [not related to operations] to income from operations (step 2) to determine N__ income
32
Q

how do companies determine net sales

A

the company deducts sales returns and allowances and sales discounts from SALES REVENUE to arrive at net sales

33
Q

gross profit

A

the excess of net sales over cost of goods sold
merchandising profit not overall profit

net sales - cogs = GP

34
Q

income from operations

A

GP - OP exp. = income from operations

35
Q

non operating activities

A
  1. various revenues and expenses unrelated to the companies main line
  2. act: other revenues and gains
    act: other exp and losses
  3. reported after operating activities on the income statement
36
Q

income tax exp

A

income before income tax - income tax exp = net income

income tax exp is subtracted from income before income tax to arrive at net income

37
Q

4 steps to multi step income statement

A
  1. subtract cogs from net sales to determine gross profit
    net sales - cogs = net profit
  2. subtract operating exp from GP to determine income from operations
    GP - Operating exp = income from operations
  3. add/ subract non operating items to income from operations to determine income before tax
    non operating items +/- income from operations = income before tax
  4. mult. the tax rate by income to determine tax exp
    tax rate x income = tax expense
38
Q

Gross profit percentage

A

GP / Net sales

39
Q

profit margin

A

profit margin is the % of a dollar that results in net income

40
Q

Describe merchandise operations and inventory systems

A

inventory is managed in 2 systems, periodic, and perpetual.

merchandising companies have sales revenue, cost of goods sold, and gross profit

41
Q

how do merchandise companies record sales

A
  1. The inventory account is debited for all purchases of merchandise and freight costs and it is credited for purchase discounts and purchase returns and allowances.
42
Q

how do companies record sales under a perpetual inventory system?

A
  1. when inventory is sold, accounts receivable or cash is debited and sales revenue is credited for the selling price of the merchandise.
  2. at the same time cogs is debited and sales revenue is credited for the cost of inventory items sold.
  3. separate contra revenue accounts exist for for sales returns and allowances and sales discounts
43
Q

over stating inventory / understating inventory

A

overstates assets and stock holders equity, understates net income / understates assets and stock holders equity overstates net income

44
Q

formula for cost of goods sold

A

beginning inventory + cog Purchased - ending inventory = cogs

45
Q

moving average method

A
  1. [cost of unit] / [ total # of units] = avg. cost per unit
  2. compute cost of goods sold [avg. coast per unit] x tot # units sold

(page 6-23)

46
Q

how does the use of LIFO in a perpetual system produce cost allocations that differ from those using LIFO in a periodic system.

A
  1. In a perpetual system, the latest units purchased PRIOR TO EACH SALE sale are allocated to cost of goods sold.
  2. In contrast, in a periodic system, the latest units PURCHASED DURING THE PERIOD are allocated to cost of goods sold. Thus, when a purchase is made after the last sale, the LIFO periodic system will apply this purchase to the previous sale.
47
Q

FiFO vs LIFO

A

Under the LIFO method using a perpetual system, the company charges to cost of goods sold the cost of the most recent PURCHASE PRIOR TO SALE.

Under perpetual FIFO, the company charges to cost of goods sold the COST OF EARLIEST GOODS ON HAND prior to each sale.

48
Q

adjustment for lifo reserve

A

With increasing prices, FIFO will result in higher income than LIFO. On the balance sheet, FIFO will result in higher reported inventory. The financial statement differences from using LIFO normally increase the longer a company uses LIFO.

49
Q

LIFO reserve

A

the difference between inventory reported using LIFO and inventory using FIFO. This amount is referred to as the LIFO reserve

50
Q

inventory turn over / days in inventory

A

The inventory turnover is calculated as cost of goods sold divided by average inventory. It indicates the liquidity of inventory by measuring the number of times the average inventory “turns over” (is sold) during the year. Gogs / avg. inventory]= inventory turnover

Inventory turnover can be divided into 365 days to compute days in inventory,

51
Q

lower cost of net realizable

A

lower of cost or net realizable value definition. In the context of inventory this means that the inventory should be reported at the lower of its cost or its net realizable value (NRV)

52
Q

conservatism

A

LCNRV is an example of the accounting concept of conservatism, which means that the best choice among accounting alternatives is the method that is least likely to overstate assets and net income

53
Q

net realizable value refers to

A

net realizable value refers to the net amount that a company expects to realize (receive) from the sale of inventory. Specifically, net realizable value is the estimated selling price in the normal course of business, less estimated costs to complete and sell.

54
Q

Presentation
Recall that inventory is classified in the balance sheet as a current asset immediately below receivables. In a multiple-step income statement, cost of goods sold is subtracted from net sales. There also should be disclosure of (1) the major inventory classifications, (2) the basis of accounting (cost, or lower-of-cost-or-net realizable value), and (3) the cost method (FIFO, LIFO, or average-cost).

A

inventory is classified in the balance sheet as a current asset immediately below receivables.
In a multiple-step income statement, cost of goods sold is subtracted from net sales. There also should be disclosure of : (1) the major inventory classifications,
(2) the basis of accounting (cost, or lower-of-cost-or-net realizable value), and
(3) the cost method (FIFO, LIFO, or average-cost).

55
Q

consistency concept

A

consistency concept

means that a company uses the same accounting principles and methods from year to year.

56
Q

which inventory method has the lowest tax payments.

and also impacts the quality of earnings ratio?

A

LIFO has the highest net cash provided by operating activities because it results in the lowest tax payments. Since cash flow is the lifeblood of any organization, the choice of inventory method is very important.

LIFO also impacts the quality of earnings ratio. Recall that the quality of earnings ratio is net cash provided by operating activities divided by net income.

57
Q

why does LIFO result in lower income tax than FIFO?

A

LIFO results in the lowest income taxes (because of lower net income)

58
Q

NAME A major advantage of the FIFO method in a period of inflation vs LIFO

A

A major advantage of the FIFO method is that in a period of inflation, the costs allocated to ending inventory will approximate their current cost.

a major shortcoming of the LIFO method is that in a period of inflation, the costs allocated to ending inventory may be understated in terms of current cost.

example: balance sheet shows ending inventory of $9,700 million. But the inventory’s actual current cost if FIFO had been used is $12,189 million.

59
Q

does fifo or lifo present the most accurate picture of net income?

A

LIFO presents a more realistic net income number. That is, LIFO matches the more recent costs against current revenues to provide a better measure of net income.

During periods of inflation, many challenge the quality of non-LIFO earnings, noting that failing to match current costs against current revenues leads to an understatement of cost of goods sold and an overstatement of net income. As some indicate, net income computed using FIFO creates “paper or phantom profits”—that is, earnings that do not really exist.

60
Q

why do companies use FIFO?

A

companies tend to prefer FIFO because it results in higher net income. IN A PERIOD OF RISING PRICES FIFO reports the highest net income

61
Q

why on the income statement are ending inventory and cost of goods sold are different?
(FIFO, LIFO, AVG. Cost)

A

This difference is due to the unit costs that the company allocated to cost of goods sold and to ending inventory. Each dollar of difference in ending inventory results in a corresponding dollar difference in income before income taxes.

62
Q

weighted average unit cost

A

COG available for sale / total units for sale = weighted avg. cost

63
Q

obtain the ending inventory using LIFO

A

under LIFO, companies obtain the cost of the ending inventory by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory have been costed.

64
Q

obtain the ending inventory using FIFO

A

under FIFO, companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed.

65
Q

consigned goods

A

it is common to hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods. These are called consigned goods

66
Q

FOB (free on board) shipping point,

A

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

67
Q

FOB destination,

A

ownership of the goods remains with the seller until the goods reach the buyer.

68
Q

just-in-time method

A

Under a just-in-time method, companies manufacture or purchase goods only when needed

69
Q

manufacturers usually classify inventory into three categories: ______ _______ _____

A

manufacturers usually classify inventory into three categories: finished goods, work in process, and raw materials. Finished goods inventory is manufactured items that are completed and ready for sale. Work in process is that portion of manufactured inventory that has been placed into the production process but is not yet complete.

70
Q

two common characteristics or merchandise: ________ ______

A

(1) they are owned by the company, and (2) they are in a form ready for sale to customers in the ordinary course of business. Thus, merchandisers need only one inventory classification, merchandise inventory,

Accounting 1 (2 decks)

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