Chapter 6 Flashcards
What is inventory?
Goods and materials that a business holds to resale or use for production.
What account is inventory considered?
Current Asset
What sells services, collects cash, and pays operating expenses
Service providers
Do service providers have inventory?
No
What do merchandising companies do?
Buy inventory, sell inventory, collect cash, and pay operating expenses
The company has inventory accounts called raw materials, work-in-process, and finished goods.
Manufacturer
What are wholesalers?
The company is a “middle-man”, buying from a supplier and selling to other companies
The company buys completed products and sells them to consumers
Retailer
What is overhead?
Ongoing expenses of operating a business that are not directly tied to producing goods or services.
In what accounts are overhead and labor added to?
Work in Process (A)
Where accounts does the credit amount of raw materials goes to?
Work in Process
If I had $60 credited in a work in process account, where would that amount end up?
Finished goods
Define Product Costs
All the cost incurred to manufacture/make a product so that it can be sold
What is period costs?
expenses that are not directly tied to the production of goods or services and are incurred over a specific period of time
What does it mean to capitalize a cash payment?
Record it as an asset on the balance sheet rather than expense it immediately
What do you capitalize?
All cost necessary to get the inventory ready for sale.
When can revenue from inventory sales be recognized?
generally upon delivery or when legal title transfers from the buyer to the seller
If the legal title (who owns goods) transfers as a product is shipped, what is this called?
FOB Shipping Point
Define FOB Destination
the seller retains ownership and responsibility until the goods reach the buyer’s location
If a problem says that the buyer could receive a discount of 2/10, n/40 what does that mean?
2% discount if paid within 10 days; must be paid within 40 days
When a discount is not taken the late fee is debited to interest expense (+E): is this a product or period cost? Why?
This is a period cost because it is an expense (not capitalized like assets) that is not directly associated with the production of goods.
What is a perpetual inventory system, and who uses this?
constantly records cost going up when inventory goes down; small businesses
What is a periodic inventory system, and who uses this?
record of COGS only at the end of the period (done once); bigger companies
What is gross profit?
the amount of money a company makes after accounting for the direct costs associated with producing its goods or services.
What equation for gross profit?
Revenue - COGS = Gross Profit
Why would an investor want to know the gross profit of a company?
indicates how efficiently a company is producing and selling its products
Formula of ending inventory:
Beginning inventory + purchases - COGS = ending inventory
Equation for COGS:
Beginning inventory + purchases = COGS
Equation for EPS:
Net income/number of common shares
What does EPS stand for?
Earnings per share
