Chapter 6 Financial Accounting Flashcards
Inventory
Items held by the company for re-sale
What financial statement does inventory go on?
Balance Sheet
How would you classify inventory?
Current Asset
In inventory items that are sold are called…
Cost of Good Solds
What is sales revenue based on?
Retail price of inventory
What are the cost of goods sold based on?
Cost of Inventory
Gross Profit
Sales revenue - Cost of Goods Sold
What is another name for Gross Profit?
Gross Margin
What does Gross Profit represent?
Markup on products
In Gross Profit gross means
Expenses have not been deducted yet
What are the 2 ways to account for inventory?
Periodic
Perpetual
What are 4 characteristics of the Periodic method of inventory?
Counts items to determine quantity on hand
Used for inexpensive items
Used by small businesses
Low cost
What are 3 characteristics of the Perpetual method for inventory?
Running record of inventory kept by computer program
Used by large business
Scanners and bar codes used to record transactions
What is the equation for Net Cost of Purchases?
Purchase price + Freight-in - Purchase returns- Purchase allowances- Purchase Discounts = Net Cost of Purchases
Freight-in
Transportation costs
Purchase Returns
Unsuitable goods returned to seller
Purchase Allowances
The reduction in the amount owed
Purchase Discounts are for….
Early payment
In Discount terms how would you read 2/10?
There is a 2% discount if bill is paid in 10 days
In discount terms how would you read n/30?
Full amount is due in 30 days
Purchase Discounts
Company receives discount to customers for early payment
What do purchase discounts reduce?
Cost of inventory
Sales Discounts
Company offers discount to customers for early payment
What does sales discount reduce?
Reduces cash received on accounts receivable
What is the Net sales equation?
Sales Revenue - Sales Returns - Sales Allowances - Sales Discounts = Net Sales
Sales Returns
Unsuitable goods returned to the company
Sales Allowances
Reduction in amount owed
Sales Discounts
Are for early payments
What are the 4 inventory costing methods?
Specific-unit-cost
Average Cost
FIFO
LIFO
What are 3 characteristics of FIFO?
first one in, first out
- oldest items assumed to be sold first
- Ending inventory will consist of most recent items purchased
What are 3 characteristics of LIFO?
Last in, first out
Newest items are assumed to be sold first
Ending inventory consists of oldest items in inventory
Specific Unit Cost
Each item in inventory can be separately identified
What is the specific unit of cost method used for?
Unique items like cars and fine jewelry
What is an example of a business using FIFO?
Grocery Store- oldest products on the shelf first so you buy them first
What is an example of an industry using LIFO?
Technology such as IPhones
FIFO has the lowest cost of goods or ending inventory?
Lowest on Cost of Goods Sold due to it being based on older costs
FIFO has the highest cost of goods or ending inventory?
Ending Inventory because it is based on recent costs
LIFO has the lowest costs of goods sold or ending inventory?
Ending inventory because it is based on older costs
LIFO has the highest costs of goods sold or ending inventory?
Cost of Goods Sold because it is based on recent costs
What does LIFO eliminate?
LIFO inventory eliminates the make believe profits caused by inflation but the ending inventory is less than it should be
What does FIFO correctly report?
The inventory at its most current price but the income statement will show a higher profit due to inflation
What are 4 tax advantages for LIFO?
LIFO results in higher cost of goods sold
Higher cost of goods sold result in lower net income
Lower net income results in lower taxes
Lower taxes result in greater cash flow
What are the differences between FIFO and LIFO interns of balance sheet and income statement?
FIFO
Balance sheet has more recent costs
Does not match current costs with revenue on income statement
LIFO
Balance sheet has old and outdated costs
Matches current costs with revenue on income statement
What are the 3 accounting principles related to inventory?
Consistency
Disclosure
Conservatism
Consistency
Companies should use same inventory method period by period
Disclosure
Companies should disclose inventory method used
Conservatism
Companies should “write down” inventory if market price falls below cost
Lower of Cost or Market (LCM)
Inventory should be reported at whichever is lower- cost or market
In terms of Lower of cost or market (LCM) market equals…
Current replacement cost
In terms of Lower of Cost or Market (LCM), if cost is lower what happens?
No adjustment needs to be made
In terms of Lower of Cost or Market (LCM), what 2 things happens if market is lower?
Inventory is decreased to market value
Cost of goods sold is increased
