COGS and Inventory Accounting

Question 1

Sales Revenue + Cost of Goods Sold =

Answer 1

Gross Profit (margin) - Operating expenses = Net income

Question 2

Perpetual Inventory gives…

Answer 2

continuous information on the dollar amount of inventory and cost of goods sold
- account for change in real time with each sale

Question 3

True Perpetual inventory system has what accounts?

Answer 3

Inventory (Credit)

Cost of Goods Sold (debit)

Question 4

Period inventory system…

Answer 4

Physical inventory will be run at the end of the accounting period and a period end adjusting entry will be used to compute the cost of goods available for sales

Question 5

Periodic COGS =

Answer 5

beginning inventory + (Net purchases + freight) - ending inventory

Question 6

Define shrinkage

Answer 6

The difference between the physical inventory and the inventory account maintained by the computer
- Perpetual system only

Question 7

How do you handle shrinkage in accounts?

Answer 7

Difference is debited to COGS and credited to inventory (you just lost the money)

Question 8

Store manager determines there is $425 dollars of shrinkage, how do you show this in accounts?

Answer 8

COGS
Debit | Credit
425 |

Inventory
Debit | Credit
| 425

Question 9

In periodic inventory the end of period inventory is used…

Answer 9

To calculate COGS and ending inventory is recorded as an asset on the balance sheet (all goods that are for resale)

Question 10

Define Perpetual System

Answer 10

Maintain accurate day-to-day value of the business’ inventory and requires individual accounts for every stock keeping unit
- Every time something is purchased or sold, the account has to be updated

Question 11

Define Periodic System

Answer 11

No adjustments are made to inventory until close of accounting period
Take and End of period inventory (EI) and this becomes BI for the next period

Question 12

COGS =

Answer 12

(BI + Purchases + Freight) - EI

Question 13

Pharmacies have what kind of system?

Answer 13

Periodic but moving towards perpetual with the use of Point of Sales systems

Question 14

Where is most purchasing done?

Answer 14

Wholesalers

Question 15

What determines the cost?

Answer 15

Acquisition cost + wholesaler fee

Question 16

What determines the wholesaler fee?

Answer 16

Buying groups negotiation
Monthly volume of purchases
How well you negotiate down the cost

Question 17

Special payment terms?

Answer 17

Most of the time if you pay in a certain time you will get a discount or if you prepay you will get the largest discount

Question 18

How do wholesalers make money?

Answer 18

They make their money off of rebates from the manufacturers
- If they meet a certain amount of sales they get so much back
Charge backs

Question 19

Define Charge backs

Answer 19

Large buying group negotiates a price that is less than what the manufacturer charges the wholesaler and the wholesaler then charges back the difference to the manufactures

Question 20

Perpetual System: Joe purchases $35 of prescriptions with cash (only cost the owner $25 Show T charts.

Answer 20

Cash
Debit | Credit
35

Sales
Debit | Credit
35

COGS
Debit | Credit
25

Inventory
Debit | Credit
25

Question 21

John Day returns $200 of incorrectly picked drug purchased on credit. Show T charts for periodic

Answer 21

Account Payable
Debit | Credit
200

Purchase Return
Debit | Credit
200

Question 22

John Day returns $200 of incorrectly picked drug purchased on credit. Show T charts for perpetual

Answer 22

Account Payable
Debit | Credit
200

Inventory
Debit | Credit
200

Question 23

Harry Johnson pays a bill $100 previously purchased on credit with terms of 2/10;N30 within 6 days of his date. Show T charts for periodic

Answer 23

Accounts Payable
Debit | Credit
100

Cash
Debit | Credit
98

Purchase Discount
Debit | Credit
2

Question 24

Harry Johnson pays a bill $100 previously purchased on credit with terms of 2/10;N30 within 6 days of his date. Show T charts for perpetual

Answer 24

Accounts Payable
Debit | Credit
100

Cash
Debit | Credit
98

Inventory
Debit | Credit
2

Question 25

Grandma Moses returns a $50 vaporizer that she had bought on credit. The Acquisition cost of the vaporizer is $30. Show T charts for periodic

Answer 25

Sales Return
Debit | Credit
50

Accounts Receivable
Debit | Credit
50

Question 26

Grandma Moses returns a $50 vaporizer that she had bought on credit. The Acquisition cost of the vaporizer is $30. Show T charts for perpetual

Answer 26

Sales
Debit | Credit
50

Accounts Receivable
Debit | Credit
50

Inventory
Debit | Credit
30

COGS
Debit | Credit
30

Question 27

COGS Periodic requires

Answer 27

Out-dated merchandise be removed (not inventory)
Wasted controlled substances removed (not inventory)
Use tags to prevent double counting
All items must have a cost assigned (last invoice)

Question 28

Define Specific Invoice Prices

Answer 28

Sticker each bottle as it comes into the store so you know the cost of that bottle or use SKU

Question 29

Define SKU

Answer 29

Stock Keeping Unit

Record the number of remaining tablets, capsules and their individual prices and total

Question 30

Define Weighted Average method

Answer 30

Yields a cost that is representative of the cost of the product over the entire accounting period
(total cost/total units = weighted average method)

Question 31

Define FIFO

Answer 31

First In: First Out
First drugs in will be sold before the new drugs that come in after those
Cost of the last items purchased are assigned to ending inventory

Question 32

Define LIFO

Answer 32

Last in; first out

Last goods received are matched with the revenues generate for that period

Question 33

When your ending inventory is the lowest,…?

Answer 33

You have the highest COGS which shows less gross profit which means you pay less taxes (woot!)
AKA: LIFO

Question 34

Gross Margin =

Answer 34

Sales-COGS

Question 35

If gross profit increases =

Answer 35

you pay more taxes