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Accounting 260: Exam 2 > Chapters 5 & 6 > Flashcards

Chapters 5 & 6 Flashcards

1
Q

Format for Multiple Step Income Statement

A 
Sales
      Sales revenue
      Less: Sales R&A
                Sales discounts
Net Sales
Cost of Goods Sold 
Gross Profit 
Operating Expenses
Other revenues and gains
Other expenses and losses
Net Income
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2
Q

Cost of Goods Sold(Periodic)

A
  • Under periodic system, Cost of Goods Sold isn’t determined until end of the period
  • At the end of the period, the company performs a count to determine the ending balance of of inventory
  • It then calculates the cost of goods sold by subtracting ending inventory from Cost of Goods Available for Sale
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3
Q

Cost of Goods Sold formula

A

Beginning Inventory + Purchases - Ending Inventory

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4
Q

Cost of Goods Available for Sale Formula

A

Beginning Inventory + Purchases

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5
Q

Gross Profit

A

Net Sales - Cost of goods sold

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6
Q

Net Income

A

Income before taxes - income tax expense

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7
Q

Cost of Goods Purchased Formula

A

Purchases - Purchase Returns and Allowances - Purchase Discounts + Freight In

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8
Q

Perpetual System

A
  • A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.
  • Determines the cost of goods sold each time a sale occurs
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9
Q

Periodic System

A

-An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of the accounting period.

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10
Q

Periodic System Steps

A

1) Determine the cost of goods available for sale at the beginning of the accounting period
2) Add to it the cost of goods purchased
3) Subtract the cost of goods available for sale as determined by the physical inventory count at the end of the accounting period

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11
Q

Perpetual System vs. Periodic System

A

Perpetual - continuously updates inventory and cost of goods sold

Periodic - updates inventory and cost of goods sold only periodically (@ end of each period)

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12
Q

Inventory Purchase Journal Entries (Perpetual Method)

A

Purchase of merchandise on credit -> debit Inventory and credit Accounts Payable

Freight costs on purchases -> debit Inventory and credit cash

Purchase Returns and Allowances -> debit Accounts Payable and credit Inventory

Payment on account with a discount -> Debit Accounts Payable and credit cash and Inventory

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13
Q

Inventory Purchase Journal Entries (Periodic Method)

A

Purchase of merchandise on credit -> Debit purchases and credit accounts payable

Freight costs on purchases -> Debit Freight-In and credit cash

Purchase returns & allowances -> Debit Accounts Payable and Credit Purchase Returns and Allowances

Payment on account with a discount -> Debit Accounts Payable and Credit Cash and Purchase discounts

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14
Q

Inventory Sales Journal Entries (Perpetual Method)

A

Sale of merchandise on credit -> Debit A/R and Credit Sales Revenue, then for same date Debit COGS and credit Inventory

Return of merchandise sold -> Debit Sales R&A and credit A/R, then for same date Debit Inventory and credit Cost of Goods Sold

Cash received on account w/ a discount -> Debit Cash, debit sales discounts, and credit A/R

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15
Q

Inventory Sales Journal Entries (Periodic Method)

A

Sale of merchandise on credit -> Debit A/R and credit sales revenue (no entry for COGS)

Return of merchandise sold -> Debit Sales R&A and credit A/R (no entry for COGS)

Cash received on account with a discount -> Debit Sales discounts and credit A/R

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16
Q

Profit Margin

A

Higher value suggests favorable return on each dollar of sales

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17
Q

FOB Destination

A
  • Means that the seller places the goods free on board to the buyer’s place of business, and the seller pays the freight.
  • ownership of goods remains with the seller until the goods reach the buyer
18
Q

FOB Shipping Point

A
  • Means that the seller places the goods free on board the carrier, and the buyer pays the freight costs
  • Ownership of goods passes to the buyer when the public carrier accepts the goods from the seller
19
Q

Consigned goods

A
  • Goods held for sale by one party although ownership of the goods is retained by another party
  • They remain property of original owner
20
Q

Specific Identification Method

A
  • An actual physical-flow costing method in which particular items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory.
  • Same for perpetual and periodic
  • Method where cost is given to you
21
Q

LIFO Reserve

A
  • Amount by which (end) Inventory would be valued differently(higher) had FIFO been used
  • Don’t use to adjust numbers on financial statements
  • For a company using LIFO, the difference b/w inventory reported using LIFO and inventory using FIFO.
  • Reporting it enables analysts to make adjustments to compare companies that use different cost flow methods.
22
Q

Inventory Turnover

A

A ratio that indicates the liquidity of inventory by measuring the number of times average inventory is sold(turns over) during the period; computed by cost of goods sold divided by the average inventory during the period.

23
Q

Days in Inventory

A
  • Want a high rate
  • Measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover
  • High inventory turnover(low days in inventory) indicates the company has minimal funds tied up in inventory (It has a minimal amount of inventory on hand at any one time)
  • Turnover = # of times you sell inventory to support your sales level
  • Higher turnover = smaller # of days in inventory (What companies want)
24
Q

Inventory Turnover Formula

A

COGS/Avg Inventory

25
Q

Days in Inventory

A

365/Inventory Turnover

26
Q

Income Statement Effects (Part 1)

A

1) In a period of inflation, FIFO produces a higher net income b/c lower unit costs of the first units purchased are matched against revenure.
2) In a period of inflation, LIFO produces a lower net income b/c higher unit costs of the last goods purchased are matched against revenue
3) If prices are falling, the results from the use of FIFO & LIFO are reversed. FIFO will report the lowest net income & LIFO the highest.
4) Regardless of whether prices are rising or falling, average-cost produces net income b/w FIFO & LIFO

27
Q

Income Statement Effects (Part 2)

A
  • When prices are rising, companies prefer FIFO(higher net income)
  • LIFO = More realistic net income number(better measure)
  • Net income computed using FIFO creates “paper or phantom profits” (earnings that do not really exist)
28
Q

Balance Sheet Effects

A
  • Major advantage of FIFO method: in a period of inflation, the costs allocated to ending inventory will approximate their current cost
  • Major shortcoming of LIFO method: in a period of inflation, the costs allocated to ending inventory may be significantly understated in terms of current cost. The understatement becomes greater over prolonged periods of inflation if the inventory includes goods purchased in one or more prior accounting periods.
29
Q

Tax Effects

A
  • Both inventory on balance sheet and net income on income statement are higher when companies use FIFO in a period of inflation; yet many companies use LIFO -> why?
  • > LIFO results in the lowest income taxes(b/c of lower net income) during times of rising prices
30
Q

Factors of FIFO

A
  • Highest net income and lowest cost of goods sold
  • Provide highest ending inventory
  • Results in higher phantom profits
  • Results in lower net cash provided by operating activities
31
Q

Factors of LIFO

A
  • Results in the lowest income tax expense(generates lowest profit b/c cost of goods sold is highest)
  • Results in a higher quality of earnings ratio
  • Results in lower taxes
  • Highest net cash provided by operating activities b/c it results in the lowest tax payments
  • Reports a conservative measure of net income, which decreases the ratio’s denominator: It provides a conservative measure of net income b/c it doesn’t include phantom profits reported under FIFO
32
Q

Factors of Average-Cost Method

A

Results in the most stable earnings over a number of years

33
Q

Weighted-Average Unit Cost Formula

A

CGAS/Total Units Available for Sale

34
Q

FIFO (First-In, First-Out)

A
  • An inventory costing method that assumes that the earliest goods purchased are the first to be sold
  • Sell oldest units first
  • Costs of earliest goods purchased are the 1st to be recognized in determining the cost of goods sold regardless of which unit were actually sold
  • Companies determine the cost of ending inventory by taking the unit cost of the most recent purchase and working backwards until all units of inventory have been costed.
35
Q

LIFO (Last-In, First-Out)

A
  • An inventory costing method that assumes that the latest units purchased are the first to be sold
  • Goods are removed from the top of the pile as they are sold
  • Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold
  • Companies obtain the cost of ending inventory by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory have been costed.
36
Q

LIFO/FIFO/Average-Cost (Periodic Method) Part 1

A
  1. Find Cost of Goods Available for Sale
    -> Beginning Inventory
    -> Purchases
    (units x unit cost = total cost(CGAS))
  2. total units - units sold(add up units from sales) = units for cost of goods sold
  3. LIFO -> Work up from purchases to get to units for cost of goods sold
    -> ending inventory: work from top to bottom to get new units (beg. Inventory & purchases) (CGAS - COGS)
37
Q

LIFO/FIFO/Average-Cost (Periodic Method) Part 2

A
  • > LIFO COGS = CGAS - Ending Inventory
    4. FIFO -> work down from beg. inventory to purchases to get to units for cost of goods sold
  • > Ending inventory: Work from bottom to top to get new units (CGAS -COGS) (purchases)
  • > FIFO COGS = CGAS - Ending Inventory
38
Q

LIFO/FIFO/Average-Cost (Periodic Method) Part 3

A
  1. Average-Cost
    - >Ending Inventory: CGAS/Total Units = $##.## (units of CGAS - COGS) x $##.## = Total Cost
    - > Average-Cost COGS = CGAS - Ending Inventory
  2. If Gross Profit & Gross Profit Rate, find sales Revenue (add up total sales units & multiply costs)
    - >Gross Profit: Sales Revenue - COGS
    - >Gross Profit Rate: Gross Profit/Net Sales
39
Q

Gross Profit Rate Formula

A

Gross Profit/Net Sales

40
Q

Profit Margin Formula

A

Net Income/Net Sales

Accounting 260: Exam 2 (1 decks)

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