chapter five notes

Question 1

sales discount

Answer 1

incentive for customers to pay early

Question 2

ex: 1/15;net 30

Answer 2

discount is 1% if paid in 15 days

otherwise…entire amount is due in 30 days

Question 3

sales returns and allowances

Answer 3

when customers return merchandise or receive damaged goods

Question 4

what type of accounts are sales discounts and sales returns and allowances?

Answer 4

contra revenue accounts

Question 5

net sales

Answer 5

sales-sales discounts-sales returns and allowances

Question 6

net income on a multi step income statement

Answer 6

net sales
-cogs
=gross profit
-operating expenses
=income from operations 
\+/- gains/ loss
\+/- interest revenue/expense
=net income

Question 7

gross

Answer 7

entire amount

Question 8

net

Answer 8

entire amount-reductions

Question 9

cost of goods sold

Answer 9

“cost of sales”

Question 10

inventory cost includes ________, ________, and _________

Answer 10

freight-in
sales tax
insurance during transit

Question 11

perpetual inventory

Answer 11

• debits inventory account
• updates cogs and inventory with each sale
• uses loss on shrinkage

Question 12

what is the first inventory entry?

Answer 12

inventory x

cash x

Question 13

what is the second inventory entry?

Answer 13

cash x
revenue x

cost of goods x
inventory x

Question 14

what is the third inventory entry?

Answer 14

loss on shrinkage x

inventory x

Question 15

periodic inventory

Answer 15

• debits purchases account
• makes no entries to cogs or inventory
• make a physical count at the end of year to determine cogs

Question 16

what is the formula for cost of goods sold using the periodic inventory?

Answer 16

beginning inventory
\+net purchases
=goods available for sale
-ending inventory
=cost of goods sold

Question 17

it doesn’t matter which method you use, ____ _____ ___ _ _______ _____.

Answer 17

you must do a physical count

Question 18

what is the aje to record cogs for periodic inventory?

Answer 18

ending inventory x
cost of goods sold x
beginning inventory x
net purchases x

Question 19

periodic system

Answer 19

all items purchased for resale are debited to a “PURCHASES” account

Question 20

perpetual system

Answer 20

keeps a running total of the inventory on hand. identifies “LOSSES”

Question 21

goods in transit

Answer 21

goods ordered but not yet received

Question 22

FOB Shipping Point

Answer 22

BUYER (pays for shipping)

title transfers when goods are accepted

Question 23

FOB Destination

Answer 23

SELLER (pays for shipping)

title transfers when goods are delivered to destination

Question 24

consigned goods

Answer 24

the owner (consignor) transfers physical goods to agent (consignee) for purposes of selling WITHOUT giving up legal title

Question 25

goods called in

Answer 25

if goods are ordered, as long as goods are identified and separate, they belong to buyer

Question 26

specific identification

Answer 26

small quantity of inventory, high-priced items, impractical for most business

Question 27

what are examples of industries that use specific identification?

Answer 27

auto industry | custom jewelry industry

Question 28

what is an advantage of specific identification?

Answer 28

exact and accurate

Question 29

average cost method

Answer 29

uses weighted average of all costs for goods available for sale (assigned average cost to both ending inventory and cogs)

Question 30

what is an advantage of average cost method?

Answer 30

assigns cost on an equal unit basis to both ending inventory and cogs and its easy!!!

Question 31

FIFO

Answer 31

the cost of the first item purchased=the cost of the first item sold (cogs)

Question 32

what are advantages of FIFO?

Answer 32

- assigns current cost to ending inventory - good method when inventory turnover is rapid BALANCE SHEET

Question 33

what are disadvantages of FIFO?

Answer 33

- fails to match most recent costs with revenues | - if prices are rising, matches oldest unit costs with current revenues therefore making Net Income higher/overstated

Question 34

inventory profits

Answer 34

when you show a big profit number, you're using FIFO and have rising prices (lower expenses shown)

Question 35

LIFO

Answer 35

cost of last item purchased=cost of first item sold

Question 36

what are advantages of LIFO?

Answer 36

- matches current costs with current revenues - reduces income taxes with rising prices INCOME STATEMENT

Question 37

LIFO conformity rule

Answer 37

if you use LIFO for tax purposes, you must also use this method for financial reporting purposes

Question 38

what are disadvantages of LIFO?

Answer 38

- gives non-current value to inventory on balance sheet - if IFRS are adopted LIFO will not be allowed as a reporting method BALANCE SHEET

Question 39

LIFO has the highest _____ | and the lowest ____

Answer 39

cost of goods sold | ending inventory

Question 40

if auditors determine mistake as material...

Answer 40

redo statements

Question 41

if auditors determine mistake as immaterial...

Answer 41

put note in footnotes of statements

Question 42

inventory turnover ratio

Answer 42

measures if company keeps excess stock of inventory

Question 43

we want a _____ inventory turnover ratio

Answer 43

high to keep a minimum inventory carrying costs, risk of loss, and obsolescence EXCESS STOCK IS NOT PRODUCTIVE

Question 44

inventory turnover ratio

Answer 44

cost of goods sold/(beginning inventory+ending inventory/2)