Chapter 6 Flashcards
What includes items a company intends for sale to customers?
Inventory
Which financial account is inventory reported as?
A current asset
What is the cost of the inventory that is sold during the period?
Cost of Goods Sold
Which financial account is the cost of goods reported as?
A expense
Which of the following inventory accounts consists of items for which the manufacturing process is complete?
a. Raw Materials
b. Work-In-Process
c. Cost of Goods Sold
d. Finished Goods
d. Finished Goods
Cost of goods sold is:
a. Reported in the income statement
b. Reported in the balance sheet
c. A current asset
d. The cost of inventory on hand at the end of the period
a. Reported in the income statement
What reports multiple levels of profitability?
A multiple-step income statement
What is the formula to find gross profit?
Sale revenue - cost of goods sold
What is the formula to find operating income?
Gross profit - operating expense
What is the formula to find income before income taxes?
Operating income + nonoperating revenues - nonoperating expenses
Which level of profitability is considered profit from normal operations?
a. Gross profit
b. Operating income
c. Income before taxes
d. Net income
b. Operating income
What matches each unit of inventory with its actual cost?
Specific identification
What assumes first units purchased are first ones sold?
First-in, first-out (FIFO)
What assumes last units purchased are first ones sold?
Last-in, first-out (LIFO)
What assumes units sold come from random mixture?
Weighted-average cost
Fill in the Blank: FIFO or LIFO
Nearly all companies sell their actual inventory in a ____ manner
FIFO
A company has the following inventory transactions:
Jan. 1 Beginning inventory - 100 units @ $4 each
Jan. 15 Purchase - 100 units @ $5 each
Jan. 31 Purchase - 100 units @ $6 each
What would be the cost of goods sold under the FIFO method if 120 units were sold in January?
a. $600
b. $500
c. $700
d. $720
b. $500
A company has the following inventory transactions:
Jan. 1 Beginning inventory - 100 units @ $4 each
Jan. 15 Purchase - 100 units @ $5 each
Jan. 31 Purchase - 100 units @ $6 each
What would be the cost of goods sold under the LIFO method if 120 units were sold in January?
a. $600
b. $500
c. $700
d. $720
c. $700
What is the formula to find weighted average cost?
Total Cost / Total number of units
During a period of rising prices, which inventory cost flow assumption would result in the highest cost of goods sold, and thereby the lowest net income?
a. FIFO
b. LIFO
c. Weighted-average
d. FILO
b. LIFO
Which inventory method or cost flow assumption most closely resembles the actual physical flow of goods?
a. FIFO
b. LIFO
c. Weighted-average
d. FILO
a. FIFO
What maintains a continual record of inventory?
Perpetual Inventory System
What periodically adjusts for purchase and sale of inventory?
Periodic Inventory System
Make a journal entry:
On April 25, Mario’s purchases inventory for $2,700 on account (300 units @ $9 each)
4/25 Inventory 2,700
A/P 2,700
Make a journal entry:
On July 17, Mario’s sells inventory on account for $4,500 (300 units @ $15 each)
7/17 Accounts Receivable 4,500
Sales Revenue 4,500
When you make a LIFO adjustment what do you debit and credit?
You debit cost of goods and credit inventory
What is a shipment from suppliers called?
Freight-In
Which account does freight-in count towards?
Inventory
What is a shipment to customers called?
Freight-Out
Which account does freight-out count towards?
Expenses
What is a discount offered by seller to buyer for quick payment?
Purchase Discount
What is the transaction where a buyer returns unwanted or defective inventory called?
Purchase Returns
Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system?
a. Costs of incoming freight charges on merchandise inventory
b. A return of damaged inventory to the vendor
c. A purchase discount taken for prompt payment
d. Shipping charges for outgoing inventory
a. Costs of incoming freight charges on merchandise inventory
If cost is greater than net realizable value then do we have to make an adjustment entry?
No
If cost is less than net realizable value then do we have to make an adjustment entry?
Yes
What shows the number of times the firm sells its average inventory balance during a reporting period?
Inventory Turnover Ratio
What is the formula in find inventory turnover ratio?
Cost of goods sold / average inventory
What indicates the approximate number of days the average inventory is held?
Average days in inventory
What is the formula to find average days in inventory?
365 / inventory turnover ratio
Net sales are $100,000 and cost of goods sold is $70,000. Inventory balances for the past two years are $10,000 and $20,000. What is the inventory turnover?
a. 4.67 times per year
b. 7.0 times per year
c. 6.67 times per year
d. 3.5 times per year
a. 4.67 times per year
What is the indicator of the company’s successful management of inventory?
Gross Profit Ratio
What measures the amount by which the sale price of inventory exceeds its cost per dollar of sales?
Gross Profit Ratio
What is the formula to find gross profit ratio?
Gross profit / net sales
Is it better to have a higher or lower gross profit ratio?
It’s better to have a lower
When you purchase inventory on account using the perpetual system what do you debit and credit?
You debit inventory and credit accounts payable
When you purchase inventory on account using the periodic system what do you debit and credit?
You debit purchases and credit accounts payable
When a periodic inventory system and the FIFO method are used, which of the following is correct?
a. The inventory account will be continuously updated.
b. The amount of cost of goods sold will be the same under a perpetual system and the FIFO method.
c. The cost of goods sold account will be debited for the cost of each sale made.
d. The amount of ending inventory will be larger under a perpetual system and the FIFO method.
b. The amount of cost of goods sold will be the same under a perpetual system and the FIFO method.
What is the formula to find cost of goods sold?
Beginning balance + purchases - ending balance
What is the formula to find sales revenue?
Number of units sold x price
An inventory error that understates the amount of ending inventory will result in which of the following in the current year?
a. Overstated cost of goods sold
b. Overstated net income
c. Overstated assets
d. Overstated gross profit
a. Overstated cost of goods sold
What is the order of accounts on the multiple step income statement?
- Net Sales
- Cost of Goods Sold
- Gross Profit
- Selling Expense
- General Expense
- Administration Expense
- Total Operating Expense
- Operating Income (Loss)
- Nonoperating Revenue/Expense
- Income Before Tax
- Income Tax Expense
- Net Income
What are the three operating expenses on the multiple step income statement?
Selling, General, and Administration
How do you find the net income on the multiple step income statement?
Income Before Tax - Income Tax Expense
