Chapter 6 - Inventory and Merchandising Operations Flashcards
True or false: “Cost of Merchandise”, “Cost of Sales”, and “Cost of Goods Sold” describe different types of expenses.
False
The quantity of a company’s inventory is reported where?
On the balance sheet.
The cost of the goods/services that a company has sold/provided is reported where?
On the income statement.
True or false: “The cost of the inventory sold shifts from asset to expense when the seller delivers the goods to the buyer.”.
True
True or false: “gross profit” and “gross margin” is the same thing.
True
How do you calculate inventory?
Inventory = Number of units of inventory on-hand * Cost per unit of inventory
How do you calculate “Cost of Goods Sold”?
Cost of Goods Sold = Number of units of inventory sold * Cost per unit of inventory
What does the term “consignment” mean?
Goods that belong to another company.
What type of goods is the periodic inventory system typically used for?
Inexpensive goods.
Account for the perpetual inventory system.
It records all inventory and typically uses a computer to do so.
What does the term “freight-in” mean?
A transportation cost paid by the buyer to move goods from the seller to the buyer.
Explain the term “accounts receivable”.
The right to receive cash.
Explain the “weighted average” method.
The average cost of inventory during a given period.
True or false: “beginning inventory” and “ending inventory” have the same effect on “Cost of Goods Sold”.
False (“beginning inventory” is added, while “ending inventory” is subtracted)
How do you calculate gross profit?
Gross profit = Sales - Cost of Goods Sold
What is a company’s gross profit percentage an indication of?
A company’s ability to sell inventory at a profit.
True or false: the cost of inventory on-hand is an expense on the income statement.
False (it’s an asset on the balance sheet)
True or false: the cost of inventory that’s been sold is an asset on the balance sheet.
False (it’s an expense on the income statement)
Account for the four inventory methods.
- specific identification
- average cost
- FIFO
- LIFO
“Goods in Transit” includes what?
- purchased goods not yet received
- sold goods not yet delivered
“Sales Revenue” is based on what?
The sale price of inventory sold.
“Cost of Goods Sold” is based on what?
The cost of inventory sold.
Inventory is based on what?
The cost of inventory still on-hand.
Explain the term “FOB Shipping Point”.
Ownership changes hands when the goods leave the seller.
Explain the term “FOB Destination”.
Ownership changes hands when the goods are delivered to the customer.
Give examples of costs.
Purchase prices, insurance while in transit, and fees/taxes to get inventory ready to sell.
When should goods in transit be included in the buyer’s inventory?
When the terms of sale are “FOB Shipping Point”.
Merchandisers have two accounts; what are they?
- “Cost of Goods Sold” (income statement)
- inventory (balance sheet)
“Gross Profit Margin” is a measure of profitability - what does that mean?
It measures/indicates a company’s ability to cover operating expenses and make a profit.
How do you calculate “Gross Profit Margin”?
Gross Profit Margin = Gross profit / Revenue
The measurement of inventory determines what?
The amount recognized as expenses in the income statement.
How do you calculate “Weighted average cost”?
Weighted average cost = Cost of goods available for sale / Units available for sale
How do you calculate “Ending inventory”?
Ending inventory = Weighted average cost * Number of units in ending inventory
True or false: FIFO is an assignment of the oldest costs, while LIFO is an assignment of the most recent costs.
True
True or false: the perpetual inventory system updates the inventory account when a company acquires or sells goods.
True
True or false: if a company uses the FIFO method, its accounting system is still relevant.
False
Give examples of what the perpetual inventory system records.
Inventory purchases, purchase returns, inventory sales, and settlement discounts.
How do you calculate “Net Realizable Value”?
Net Realizable Value = Estimated selling price - Estimated costs
How must inventory be measured?
At the lower of cost and net realizable value.
