Midterm 2 Flashcards
Details of a Perpetual system
1) Maintain detailed records of the cost of each inventory scale
2) Records continuously show inventory that should be on hand
3) Company determines COGS each time a sale occurs
Details of a Periodic system
1) Do not keep detailed records of the goods on hand
2) COGS sold determined by count at the end of the period
3) Calculation of COGS
What are the advantages of a perpetual system?
1) Used for merchandise with high unit value
2) Provides better control
3) Requires additional clerical work and additional costs to maintain records
What is FOB shipping point?
- Ownership transfers to buyer when public carrier accepts goods
- Buyer pays costs
What is FOB destination?
- Ownership remains with the seller until goods reach buyer
- Seller pays costs
How do you account for a purchase return?
1) debit Sales Returns and Allowances
2) credit Accounts Receivables
3) debit Inventory
4) credit COGS
What is the formula for Gross Profit Rate?
(Gross Profit) / (Net Sales)
What is the formula for Profit Margin Ratio?
(Net income) / (Net Sales)
What are the main characteristics of FIFO?
- Lowest COGS
- Highest tax expense, net income, inventory balance
What is the Lower of Cost or Market?
When the value of inventory is lower than its cost
What is the formula for Inventory Turnover Ratio?
(COGS) / (Avg Inventory)
What is the formula for Days in Inventory?
(365) / (Inventory Turnover Ratio)
What is Establishment of Responsibility?
Control is most effective when only one person is responsible for a given task
What is Segregation of Duties?
Related duties should be assigned to different individuals
What are Documentation Procedures?
Companies should use prenumbered documents and all documents should be accounted for
