Inventories and the Cost of Goods Sold

Question 1

define inventory

Answer 1

consists of all goods owned and held for sale to customers

expected to be converted into cash within the company’s operating cycle

Question 2

where is inventory listed

Answer 2

it is listed after the accounts receivable in the balance sheet because it is just one step farther from conversion into cash

Question 3

inventory is a what

Answer 3

non-financial asset

Question 4

what happens when items from the inventory are sold

Answer 4

their costs are removed from the balance sheet and transferred to the COST OF GOODS SOLD — cogs is a contra against sales revenue in the income statement

Question 5

enumerate the flow of costs through financial statements

Answer 5

purchase cost -> incurred as an asset in inventory

when goods are sold:
INCOME STATEMENT

Revenue
COGS
Gross profit
EXPENSES
Net income

Question 6

what is the company’s largest asset and expense?

Answer 6

inventory and cost of goods sold

Question 7

what’s the process when identical items are acquired at different costs

Answer 7

a new COST LAYER is created whenever units are acquired at a different per-unit cost

Question 8

when an item is purchased, what cost should be removed from the inventory account and recognized as the cost of goods sold — whats the process in identifying the mentioned?

Answer 8

1. specific identification

2. cost flow assumption

Question 9

define cost flow assumption

Answer 9

the seller simply makes an assumption as to the sequence in which units are withfrawn from the inventory

utilized when a company has a large number of IDENTICAL items that were purchased at DIFFERENT items

Question 10

3 cost flow assumptions:

Answer 10

average cost
fifo
lifo

Question 11

define average cost

Answer 11

values all merchanndise at the average per unit cost

units are withdrawn from the inventory in random order

Question 12

FIFO

Answer 12

goods sold are the FIRST UNITS that were purchased

Remaining inventory are the OLDEST goods on hand

Question 13

LIGO

Answer 13

Goods sold are the MOST RECENTLY PURCHASED

Remaining inventory consists of earliest purchases

Question 14

what happens when AC method is used

Answer 14

all units in the inventory is computed after EVERY purchase

Question 15

how to compute for ac using perpetual method

Answer 15

total cost of goods available for sale (cogas) / total number of units in the inventory

Question 16

what are the entries in the journal when a sale is made

Answer 16

debit increase cash
credit increase revenue

debit increase cost of goods sold
credit decrease inventory

Question 17

define fifo

Answer 17

first merchandise purchased is the first merchandise sold

Question 18

what kind of entry is made with the fifo mathod

Answer 18

debit increase cogs

credit decrease inventory

Question 19

define lifo

Answer 19

most recently purchased merchandise (LAST IN) is assumed to be sold first

most widely used method in determining cogs

Question 20

what is the transaction under this method lifo

Answer 20

cogs debit increase

inventory debit decrease

Question 21

what is the only requirement in using a cost flow assumption

Answer 21

units sold must be HOMOGENOUS in nature

Question 22

when is specific identification used

Answer 22

for inventories of high-priced, low volume items

each item in the inventory is unique (paintings, jewelry, real estate)

Question 23

when is a physical inventory taken

Answer 23

at the end of the company’s fiscal year

Question 24

why is a physical inventory needed

Answer 24

to adjust the perpetual inventory for unrecorded SHRINKAGE LOSSES (thefts, spoilage, breakage)

Question 25

fob shipping point vs destination

Answer 25

shipping point — goods are owned by the seller once it’s in transit

destination — goods are still owned by the seller UNTIL it reaches the buyer

Question 26

in a periodic inventory system, where is the cost of merchandise purchased debited to?

Answer 26

it is debited in the PURCHASES ACCOUNT

inventory — perpetual
PURCHASES — periodic

Question 27

enumerate the specific identification process in periodic inventory system

Answer 27

COGAS — ending inventory = COGS

Question 28

how is average cost determined?

Answer 28

total cogas / total number of units available for sale

Question 29

fifo lifo periodic inventory

Answer 29

oldest units are sold first

latest units purchased are the first sold

Question 30

2 techniques in estimating the cost of goods sold and ending inventory

Answer 30

gross profit method and retail method

Question 31

define gross profit method

Answer 31

rate of gross profit earned in the preceding year will remain the same for the current year

Question 32

how do you utilize the gross profit method

Answer 32

divide the dollar amount of net sales into two elements 1) gross profit 2) cogs

net sales is viewed as 100%

Question 33

how is cogs percentage determined

Answer 33

cost ratio

determined by gross profit rate - 100%

Question 34

how is the ending inventory estimated?

Answer 34

1. determine cogas from the beginning inventory and net purchases
2. estimate cogs by multiplying NET SALES AND COST RATIO
3. deduct cogs from cogas to find out the estimated ending inventory

Question 35

define the retail method

Answer 35

similar to gross profit method

retail method requires that management determine the value of ending inventory at RETAIL PRICES

value of ending inventory is then converted to its approximate cost using cost ratio