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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.


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:


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


The process of transferring the cost of metal ores and other minerals removed from the earth to an expense account is called


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


The exclusive right to use a certain name or symbol is called a


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


In a lease contract, the party who legally owns the asset is the


Fixed assets are ordinarily presented in the balance sheet

At cost less accumulated depreciation.

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