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69 Cards in this Set

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What are the two types of inventory held, and who are they held by?

Finished Inventory- Held by retailers and wholesalers

Materials Inventory- Held by Manufacturers

What are the three types of inventory costs borne by manufacturers

Direct materials

Direct Labor

Manufacturing overhead

What are the three distinct forms of inventory for a manufacturer?

Raw Materials

Work in Process

Finished Goods

What type of cost do wholesalers and retailers incur?

The purchase price

What type of account on the balance sheet would wholesalers and retailers use?

Merchandise Inventory (The account used to report inventory held for resale)

What are the three types of manufacturing costs?

Direct materials

Direct Labor

Manufacturing Overhead

What else is direct materials known as?

Raw materials

The ingredients to make the product

The inventory of a manufacturer before the addition of any direct labor or manufacturing overhead

What are three forms of inventory?

1. Direct materials or raw materials

2. Work in process

3. Finished goods

What is a material that has entered the process and some labor costs have been incurred but the product is not finished?

Work in process or work in progress

What are inventory that is complete and ready for sale?

Finished goods

What are net sales?

Where is it found?

Sales less deductions for discounts and merchandise

Found on income statement

What is gross profit?

Net sales minus cost of goods sold

Also known as Gross Margin

Why will some retailers choose a date towards the end of January to finish a fiscal year?

Holiday shopping season is over and time can be devoted to closing the records and preparing financial statements.

What is a representation of the inflow of assets?

Sales Revenue or Sales

What is used when the customer keeps the merchandise but receives a credit for a certain amount in the account balance?


What is the account for contra-revenue to record refunds to the customer and reductions of their accounts?

Sales Returns and Allowances

What does the Sales Returns and Allowances contra account reduce?

Income Statement Account

A credit term of n/30 usually means what?

The net amount of the selling price (i.e., the amount determined after deducting any returns or allowances) is due within 30 days of the date of invoice.

What does Net 10EOM mean?

The net amount is due anytime within ten days after the end of the month in which the sale took places.

What is a reduction from the selling price given for early payment?

Sales Discounts

A contra-revenue account and thus reduces sales on income statement.

What is 1/10, n/30?

Customer can deduct 1% from the selling price if the bill is paid within ten days of the date of the invoice. If the customer does not pay within the first ten days, the full invoice amount is due within 30 days.

When does the discount period normally begin?

The day AFTER the invoice

How is COGS found?

Deducted from sales to determine the gross profit for the period. Adding the purchases of the period to the beginning inventory and deducting the ending inventory.

What principle is COGS an example of?

Matching principle

What is COGS not necessarily?

Equal to the cost of purchases of merchandise during the period.

What is it called when the costs of goods purchased is added to the beginning inventory?

Cost of goods available for sale

What is a perpetual system?

A system in which the inventory account is increased at the time of each purchase and decreased at the time of each sale.\

Used by low volume high cost.

What is a periodic system?

A system in which the inventory account is updated only at the end of the period.

What helps large volume retailers do perpetual systems for inventory?

Point of sale terminals

What is the cost of shipping the goods called?

Transportation-in or Freight-in

What is an account used in a periodic inventory system to record acquisitions of merchandise


Used in Period inventory

What account is used in a periodic inventory system when a refund is received from a supplier or a reduction is given in the balance owed to a supplier?

Purchase Returns and Allowances

A contra account

How do you distinguish between inventory and operating asset?


What is a representation of the inflow of assets?

Sales revenue

How do you figure out the rate of return for Sales discounts?

Find out how much they saved by paying early

Multiply that by the number of periods of time in a year of how many days early they paid

Divide that number by the price minus the discount for rate of return.

What is COGS thought of as?

A pool of costs to be distributed between what was sold and what was not sold.

Allowance for Doubtful Accounts have what type of balance?


Sales Discounts are what type of account?


What is an account that reports the estimated amount of Accounts Receivable that may not turn to cash.

Allowance for Doubtful Accounts

Contra-asset account

The checks written by a company that have not yet cleared its bank account are known as __________ checks.


The report that sorts the accounts receivable into categories such as current, 1-30 days past due, 31-60 days past due, and so on is the __________ of accounts receivable.


What account does a periodic inventory system use but not a perpetual inventory system use?

Purchases account

What inventory FIFO or LIFO results in more profit than other cash flows?

FIFO, because the first cost is always lower.

What does PERIODIC Mean in terms of merchandise?

Not updated during the accounting period, debited to an account called "purchases"

During LIFO periodic, when must you wait until to assign the costs?

End of the period or year.

Does the flow of costs have to correspond with the physical flow of units?


Which method of inventory results in lower profit?


Under perpetual FIFO what is debited and credited during a sale?

Inventory account is credited, and COGS is debited.

Under perpetual system what two transactions occur?

(1) the sales amount is debited to Accounts Receivable or Cash and is credited to Sales

(2) the cost of the merchandise sold is debited to Cost of Goods Sold and is credited to Inventory. (Note: Under the periodic system the second entry is not made.)

Under perpetual FIFO what costs are moved to what account during a purchase?

With perpetual FIFO, the first (or oldest) costs are the first moved from the Inventory account and debited to the Cost of Goods Sold account

How does periodic LIFO save you money on income taxes?

If costs continue to rise throughout the entire year, perpetual LIFO will yield a lower cost of goods sold and a higher net income than periodic LIFO. Generally this means that periodic LIFO will result in less income taxes than perpetual LIFO

Periods of high inflation

Perpetual Average is sometimes known as what?

Moving method,

How can companies reduce their costs to get benefits in regards to inventory?

Just in time- prevents items from going obsolete.

What are two methods to estimate the ending Inventory?

Gross Profit Method

Retail Method

What must be added to the manufacturer's product cost?

Conversion costs are applied to this component of a manufacturer's product cost.

What is NRV or Net Realizable Value?

This term is defined as the selling price in the ordinary course of business minus the costs of completion and disposal.

What is the Inventory Turnover Ratio

This ratio is the result of dividing 1) the cost of goods sold for a year by 2) the average cost in inventory during the year.

What are absorption costs or full absorption costs?

This type of manufacturing accounting allocates fixed manufacturing overhead to the goods produced (along with the variable product costs). This method is required by US GAAP and U.S. income taxes.

What is the cost flow assumption?

This refers to the order in which costs will be removed from inventory and reported as the cost of goods sold. (This is independent of the physical flow of the goods.)

What is LCM or lower of cost market

This inventory valuation rule is usually associated with the accounting concept of conservatism. It is relevant when the replacement costs are less than the actual cost to purchase or produce.

What is lead time?

The duration of time between 1) the date when goods are ordered, and 2) the date when the goods are received.

What account is a contra account to purchases?

Purchase Returns and Allowances (a credit account)

Increases net income and stockholder's equity

What type of account is purchases?


What does FOB mean?

Free on board

Who owns a FOB destination point merchandise?

The seller owns the merchandise until the buyer signs at the destination point.

Who owns a FOB Shipping merchandise?

The buyer owns the product as soon as it leaves the seller's premises.

What is the total of net purchases and transportation?

Costs of goods purchased

When is transportation-in closed?

End of the period

What are the costs of the seller considered when shipping FOB destination point?

Transportation-out. It is not an addition to the costs of purchases of the seller, but a cost necessary to sell the merchandise. This is a selling expense on income statement.