Chapter 6 Financial Accounting Flashcards Preview

jeremy harmon > Chapter 6 Financial Accounting > Flashcards

Flashcards in Chapter 6 Financial Accounting Deck (51):
1

Inventory

Items held by the company for re-sale

2

What financial statement does inventory go on?

Balance Sheet

3

How would you classify inventory?

Current Asset

4

In inventory items that are sold are called...

Cost of Good Solds

5

What is sales revenue based on?

Retail price of inventory

6

What are the cost of goods sold based on?

Cost of Inventory

7

Gross Profit

Sales revenue - Cost of Goods Sold

8

What is another name for Gross Profit?

Gross Margin

9

What does Gross Profit represent?

Markup on products

10

In Gross Profit gross means

Expenses have not been deducted yet

11

What are the 2 ways to account for inventory?

Periodic
Perpetual

12

What are 4 characteristics of the Periodic method of inventory?

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

13

What are 3 characteristics of the Perpetual method for inventory?

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

14

What is the equation for Net Cost of Purchases?

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

15

Freight-in

Transportation costs

16

Purchase Returns

Unsuitable goods returned to seller

17

Purchase Allowances

The reduction in the amount owed

18

Purchase Discounts are for....

Early payment

19

In Discount terms how would you read 2/10?

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

20

In discount terms how would you read n/30?

Full amount is due in 30 days

21

Purchase Discounts

Company receives discount to customers for early payment

22

What do purchase discounts reduce?

Cost of inventory

23

Sales Discounts

Company offers discount to customers for early payment

24

What does sales discount reduce?

Reduces cash received on accounts receivable

25

What is the Net sales equation?

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

26

Sales Returns

Unsuitable goods returned to the company

27

Sales Allowances

Reduction in amount owed

28

Sales Discounts

Are for early payments

29

What are the 4 inventory costing methods?

Specific-unit-cost
Average Cost
FIFO
LIFO

30

What are 3 characteristics of FIFO?

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

31

What are 3 characteristics of LIFO?

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

32

Specific Unit Cost

Each item in inventory can be separately identified

33

What is the specific unit of cost method used for?

Unique items like cars and fine jewelry

34

What is an example of a business using FIFO?

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

35

What is an example of an industry using LIFO?

Technology such as IPhones

36

FIFO has the lowest cost of goods or ending inventory?

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

37

FIFO has the highest cost of goods or ending inventory?

Ending Inventory because it is based on recent costs

38

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

Ending inventory because it is based on older costs

39

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

Cost of Goods Sold because it is based on recent costs

40

What does LIFO eliminate?

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

41

What does FIFO correctly report?

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

42

What are 4 tax advantages for LIFO?

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

43

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

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

44

What are the 3 accounting principles related to inventory?

Consistency
Disclosure
Conservatism

45

Consistency

Companies should use same inventory method period by period

46

Disclosure

Companies should disclose inventory method used

47

Conservatism

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

48

Lower of Cost or Market (LCM)

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

49

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

Current replacement cost

50

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

No adjustment needs to be made

51

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

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

Decks in jeremy harmon Class (107):