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46 terms

Accounting Midterm #2

STUDY
PLAY
International Revenue Service (IRS)
Identifies several acceptable methods for inventory costing for reporting taxable income. They use LIFO for tax purposes, they require it to be used in financial statements.
Consistency Principle
Requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. However, if justified, a company is allowed to switch from one inventory costing method to another
When inventory prices are falling, using the LIFO costing method will generally result in a
lower cost of goods sold than under FIFO
The first-in, first-out (FIFO) method of inventory valuation is characterized by
lower (compared to the last-in-first-out method) income taxes when prices are declining
Lower of cost or market (LCM)
Look at total cost and total market and pick the lower of the two aka the cheapest option.
Some reasons that inventory errors may occur include
Physical inventory on hand was miscounted.
Costs were incorrectly assigned to inventory.
Inventory in transit was incorrectly included or excluded from inventory.
Consigned inventory was incorrectly included or excluded from inventory.
What do inventory errors effect?
Computation of COGS and Net Income
High Inventory Levels
may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage)
Low Inventory Levels
may lead to stockouts and lost sales.
Inventory Turnover
measures the number of times on average the inventory is sold during the period.

Cost of Inventory Sold / Average Inventory

(You want the number to be high since inventory leaves quickly)
Number of Days' Sales in inventory
measures the average number of days inventory is held.

Average Inventory / Avg Daily Cost of Inv. Sold

(You want the number to be low)
Periodic Inventory System
If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand
Perpetual Inventory System
the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records.
The primary difference between a periodic and perpetual inventory system is that a...
Periodic system determines the inventory on hand only at the end of the accounting period.
What is a difference between a retail business and a service business?
Merchandise inventory included in the balance sheet, the inclusion of gross profit in the income statement, in what is sold
What is NOT a difference between a retail business and a service business?
accounting equation
What accounts will only be found in the chart of accounts of a merchandising company?
Merchandise Inventory
When the three sections of a balance sheet are presented on a page in a downward sequence, it is called the
Report form
he arrangements between buyer and seller as to when payments for merchandise are to be made are called
Credit Terms
If the physical count of the inventory revealed $158,000 of merchandise on hand and the inventory records reported $163,000, what would be the necessary adjusting entry to record inventory shortage?
Cost of Merchandise Sold debit $5,000; Merchandise Inventory credit $5,000
Cumberland Co. sells $2,000 of inventory to Hancock Co. for cash. Cumberland paid $1,250 for the merchandise. Under a perpetual inventory system, which of the following journal entry(ies) would be recorded?
Cash $2,000 Dr, Sales $2,000 Cr, and Cost of Merchandise Sold $1,250 Dr, Merchandise Inventory $1,250 Cr.
What banks are cash sales?
Visa, MasterCard, and American Express
What is a major advantage of the multiple-step income statement over the single-step income statement?
The multiple-step income statement shows the relationship of gross profit to sales
Merchandise inventory at the end of the year was inadvertently overstated. Which of the following statements correctly states the effect of the error on net income, assets, and owner's equity?
Net income is overstated, assets are overstated, owner's equity is overstated.
Damaged merchandise that can be sold only at prices below cost should be valued at
Net realizable value
When merchandise sold is assumed to be in the order in which the purchases were made, the company is using
First in, First out
Under the _________ inventory method, accounting records maintain a continuously updated inventory value.
Perpetual
Which of the following methods is appropriate for a business whose inventory consists of a relatively small number of unique, high-cost items?
Specific Identification
If merchandise inventory is being valued at cost and the price level is steadily rising, the method of costing that will yield the highest net income is:
FIFO
The journal entry to record a note received from a customer to replace an account is:
Debit Notes Receivable; credit Accounts Receivable.
An alternative name for Bad Debt Expense is
Uncollectible Accounts Expense
If the direct write-off method of accounting for uncollectible receivables is used, what general ledger account is debited to write off a customer's account as uncollectible?
Bad Debts Expense
Under the allowance method of accounting for uncollectible receivables, writing off an uncollectible account
Affects only balance sheet accounts.
The balance in Allowance for Doubtful Accounts will directly impact the end of period adjustment for the bad debt expense when using which method?
Allowance Method
When a company uses the allowance method of accounting for uncollectible receivables, the entry to reinstate a previously written off account would include:
A credit to Allowance for Doubtful Accounts.
The amount of the promissory note plus the interest earned on the due date is called the
Maturity value
When the allowance method is used to account for uncollectible accounts, Bad Debts Expense is debited when
Management estimates the amount of uncollectibles.
A note receivable due in 18 months is listed on the balance sheet under the caption
Investments
The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called
Depletion
The calculation for annual depreciation using the straight-line depreciation method is
Depreciable cost / estimated useful life.
The method of determining depreciation that yields successive reductions in the periodic depreciation charge over the estimated life of the asset is
Declining-balance.
The exclusive right to use a certain name or symbol is called a
Trademark
When a company discards machinery that is fully depreciated, this transaction would be recorded with the following entry
Debit Accumulated Depreciation; credit Machinery
When the amount of use of a fixed asset varies from year to year, the method of determining depreciation expense that best matches allocation of cost with revenue is
Units-of-production
In a lease contract, the party who legally owns the asset is the
Lessor
Fixed assets are ordinarily presented in the balance sheet
At cost less accumulated depreciation.