Chapter 6 Financial Accounting

Question 1

Inventory

Answer 1

Items held by the company for re-sale

Question 2

What financial statement does inventory go on?

Answer 2

Balance Sheet

Question 3

How would you classify inventory?

Answer 3

Current Asset

Question 4

In inventory items that are sold are called…

Answer 4

Cost of Good Solds

Question 5

What is sales revenue based on?

Answer 5

Retail price of inventory

Question 6

What are the cost of goods sold based on?

Answer 6

Cost of Inventory

Question 7

Gross Profit

Answer 7

Sales revenue - Cost of Goods Sold

Question 8

What is another name for Gross Profit?

Answer 8

Gross Margin

Question 9

What does Gross Profit represent?

Answer 9

Markup on products

Question 10

In Gross Profit gross means

Answer 10

Expenses have not been deducted yet

Question 11

What are the 2 ways to account for inventory?

Answer 11

Periodic

Perpetual

Question 12

What are 4 characteristics of the Periodic method of inventory?

Answer 12

Counts items to determine quantity on hand
Used for inexpensive items
Used by small businesses
Low cost

Question 13

What are 3 characteristics of the Perpetual method for inventory?

Answer 13

Running record of inventory kept by computer program
Used by large business
Scanners and bar codes used to record transactions

Question 14

What is the equation for Net Cost of Purchases?

Answer 14

Purchase price + Freight-in - Purchase returns- Purchase allowances- Purchase Discounts = Net Cost of Purchases

Question 15

Freight-in

Answer 15

Transportation costs

Question 16

Purchase Returns

Answer 16

Unsuitable goods returned to seller

Question 17

Purchase Allowances

Answer 17

The reduction in the amount owed

Question 18

Purchase Discounts are for….

Answer 18

Early payment

Question 19

In Discount terms how would you read 2/10?

Answer 19

There is a 2% discount if bill is paid in 10 days

Question 20

In discount terms how would you read n/30?

Answer 20

Full amount is due in 30 days

Question 21

Purchase Discounts

Answer 21

Company receives discount to customers for early payment

Question 22

What do purchase discounts reduce?

Answer 22

Cost of inventory

Question 23

Sales Discounts

Answer 23

Company offers discount to customers for early payment

Question 24

What does sales discount reduce?

Answer 24

Reduces cash received on accounts receivable

Question 25

What is the Net sales equation?

Answer 25

Sales Revenue - Sales Returns - Sales Allowances - Sales Discounts = Net Sales

Question 26

Sales Returns

Answer 26

Unsuitable goods returned to the company

Question 27

Sales Allowances

Answer 27

Reduction in amount owed

Question 28

Sales Discounts

Answer 28

Are for early payments

Question 29

What are the 4 inventory costing methods?

Answer 29

Specific-unit-cost Average Cost FIFO LIFO

Question 30

What are 3 characteristics of FIFO?

Answer 30

first one in, first out - oldest items assumed to be sold first - Ending inventory will consist of most recent items purchased

Question 31

What are 3 characteristics of LIFO?

Answer 31

Last in, first out Newest items are assumed to be sold first Ending inventory consists of oldest items in inventory

Question 32

Specific Unit Cost

Answer 32

Each item in inventory can be separately identified

Question 33

What is the specific unit of cost method used for?

Answer 33

Unique items like cars and fine jewelry

Question 34

What is an example of a business using FIFO?

Answer 34

Grocery Store- oldest products on the shelf first so you buy them first

Question 35

What is an example of an industry using LIFO?

Answer 35

Technology such as IPhones

Question 36

FIFO has the lowest cost of goods or ending inventory?

Answer 36

Lowest on Cost of Goods Sold due to it being based on older costs

Question 37

FIFO has the highest cost of goods or ending inventory?

Answer 37

Ending Inventory because it is based on recent costs

Question 38

LIFO has the lowest costs of goods sold or ending inventory?

Answer 38

Ending inventory because it is based on older costs

Question 39

LIFO has the highest costs of goods sold or ending inventory?

Answer 39

Cost of Goods Sold because it is based on recent costs

Question 40

What does LIFO eliminate?

Answer 40

LIFO inventory eliminates the make believe profits caused by inflation but the ending inventory is less than it should be

Question 41

What does FIFO correctly report?

Answer 41

The inventory at its most current price but the income statement will show a higher profit due to inflation

Question 42

What are 4 tax advantages for LIFO?

Answer 42

LIFO results in higher cost of goods sold Higher cost of goods sold result in lower net income Lower net income results in lower taxes Lower taxes result in greater cash flow

Question 43

What are the differences between FIFO and LIFO interns of balance sheet and income statement?

Answer 43

FIFO Balance sheet has more recent costs Does not match current costs with revenue on income statement LIFO Balance sheet has old and outdated costs Matches current costs with revenue on income statement

Question 44

What are the 3 accounting principles related to inventory?

Answer 44

Consistency Disclosure Conservatism

Question 45

Consistency

Answer 45

Companies should use same inventory method period by period

Question 46

Disclosure

Answer 46

Companies should disclose inventory method used

Question 47

Conservatism

Answer 47

Companies should "write down" inventory if market price falls below cost

Question 48

Lower of Cost or Market (LCM)

Answer 48

Inventory should be reported at whichever is lower- cost or market

Question 49

In terms of Lower of cost or market (LCM) market equals...

Answer 49

Current replacement cost

Question 50

In terms of Lower of Cost or Market (LCM), if cost is lower what happens?

Answer 50

No adjustment needs to be made

Question 51

In terms of Lower of Cost or Market (LCM), what 2 things happens if market is lower?

Answer 51

Inventory is decreased to market value | Cost of goods sold is increased