chapter five notes Flashcards
sales discount
incentive for customers to pay early
ex: 1/15;net 30
discount is 1% if paid in 15 days
otherwise…entire amount is due in 30 days
sales returns and allowances
when customers return merchandise or receive damaged goods
what type of accounts are sales discounts and sales returns and allowances?
contra revenue accounts
net sales
sales-sales discounts-sales returns and allowances
net income on a multi step income statement
net sales -cogs =gross profit -operating expenses =income from operations \+/- gains/ loss \+/- interest revenue/expense =net income
gross
entire amount
net
entire amount-reductions
cost of goods sold
“cost of sales”
inventory cost includes ________, ________, and _________
freight-in
sales tax
insurance during transit
perpetual inventory
- debits inventory account
- updates cogs and inventory with each sale
- uses loss on shrinkage
what is the first inventory entry?
inventory x
cash x
what is the second inventory entry?
cash x
revenue x
cost of goods x
inventory x
what is the third inventory entry?
loss on shrinkage x
inventory x
periodic inventory
- debits purchases account
- makes no entries to cogs or inventory
- make a physical count at the end of year to determine cogs
what is the formula for cost of goods sold using the periodic inventory?
beginning inventory \+net purchases =goods available for sale -ending inventory =cost of goods sold
it doesn’t matter which method you use, ____ _____ ___ _ _______ _____.
you must do a physical count
what is the aje to record cogs for periodic inventory?
ending inventory x
cost of goods sold x
beginning inventory x
net purchases x
periodic system
all items purchased for resale are debited to a “PURCHASES” account
perpetual system
keeps a running total of the inventory on hand. identifies “LOSSES”
goods in transit
goods ordered but not yet received
FOB Shipping Point
BUYER (pays for shipping)
title transfers when goods are accepted
FOB Destination
SELLER (pays for shipping)
title transfers when goods are delivered to destination
consigned goods
the owner (consignor) transfers physical goods to agent (consignee) for purposes of selling WITHOUT giving up legal title
goods called in
if goods are ordered, as long as goods are identified and separate, they belong to buyer
specific identification
small quantity of inventory, high-priced items, impractical for most business
what are examples of industries that use specific identification?
auto industry
custom jewelry industry
what is an advantage of specific identification?
exact and accurate
average cost method
uses weighted average of all costs for goods available for sale
(assigned average cost to both ending inventory and cogs)
what is an advantage of average cost method?
assigns cost on an equal unit basis to both ending inventory and cogs
and its easy!!!
FIFO
the cost of the first item purchased=the cost of the first item sold (cogs)
what are advantages of FIFO?
- assigns current cost to ending inventory
- good method when inventory turnover is rapid
BALANCE SHEET
what are disadvantages of FIFO?
- fails to match most recent costs with revenues
- if prices are rising, matches oldest unit costs with current revenues therefore making Net Income higher/overstated
inventory profits
when you show a big profit number, you’re using FIFO and have rising prices
(lower expenses shown)
LIFO
cost of last item purchased=cost of first item sold
what are advantages of LIFO?
- matches current costs with current revenues
- reduces income taxes with rising prices
INCOME STATEMENT
LIFO conformity rule
if you use LIFO for tax purposes, you must also use this method for financial reporting purposes
what are disadvantages of LIFO?
- gives non-current value to inventory on balance sheet
- if IFRS are adopted LIFO will not be allowed as a reporting method
BALANCE SHEET
LIFO has the highest _____
and the lowest ____
cost of goods sold
ending inventory
if auditors determine mistake as material…
redo statements
if auditors determine mistake as immaterial…
put note in footnotes of statements
inventory turnover ratio
measures if company keeps excess stock of inventory
we want a _____ inventory turnover ratio
high
to keep a minimum inventory carrying costs, risk of loss, and obsolescence
EXCESS STOCK IS NOT PRODUCTIVE
inventory turnover ratio
cost of goods sold/(beginning inventory+ending inventory/2)
