Lecture 5 - Accounting for Inventory (Chapter 6) Flashcards
Inventory, shipping terms, gross profit, inventory methods
True or false: “Cost of Merchandise”, “Cost of Sales”, and “Cost of Goods Sold” all describe the same type of expense.
True
In terms of inventory, what does a balance sheet report?
The quantity of a company’s inventory.
In terms of inventory, what does an income statement report?
The cost of the goods/services that a company has sold/provided.
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
Account for the periodic inventory system.
Inventory isn’t updated after each sale or purchase, but at the end of a period (e.g. a month or a quarter).
Account for the perpetual inventory system.
Inventory is updated after each sale or purchase.
What does the term “freight-in” mean?
It’s a transportation cost paid by the buyer to move bought goods from the seller to the buyer.
What effect does “beginning inventory” have on “Cost of Goods Sold”?
It’s added to the expense (positive).
What effect does “ending inventory” have on “Cost of Goods Sold”?
It’s subtracted from the expense (negative).
What does the term “FOB Shipping Point” mean?
It means that ownership of goods transfers from the seller to the buyer when the goods leave the seller.
What does the term “FOB Destination” mean?
It means that ownership of goods transfers from the seller to the buyer when the goods arrive at the buyer’s location.
How do you calculate a company’s gross profit?
Gross profit = Sales - Cost of Goods Sold
What’s a company’s gross profit percentage an indication of?
It’s an indication of a company’s ability to sell inventory at a profit.
How do you calculate a company’s gross profit percentage?
Gross profit percentage = (Gross profit / Net sales) * 100
True or false: the cost of inventory on-hand is an asset on the balance sheet.
True
True or false: the cost of inventory that’s been sold is an expense on the income statement.
True
Account for the four inventory methods.
- Specific identification
- Average cost
- FIFO
- LIFO
True or false: IFRS doesn’t allow for the use of FIFO.
False (it doesn’t allow for the use of LIFO)
What does a company’s ending inventory depend on?
It depends on the counted items and their value.
True or false: FIFO is an assignment of the oldest items/costs.
True
True or false: LIFO is an assignment of the most recent items/costs.
True
