ACCT 207 EXAM 2 ACCURATE STUDY GUIDE

ACCT 207 EXAM 2 ACCURATE STUDY GUIDE


Primary Goals of inventory management - Answers - Provide sufficient quantities of high
quality inventory and minimize the costs of carrying inventory

Costs included in inventory purchases - Answers - - Invoice price, freight, inspection
costs, and preparation costs

Cost of Goods Sold (COGS) - Answers - - Total cost of merchandise sold during a
period

Nature of COGS - Answers - - Beginning inventory + purchases = Goods available for
sale - Ending inventory = Cost of goods sold

Perpetual Inventory System - Answers - - Companies maintain detailed records of the
cost of each purchase and sale. These records continuously (perpetually) show the
inventory that should be on hand for every item
- Companies determine the cost of goods sold EACH TIME A SALE OCCURS (know
the inventory at all times)
- Companies use when they sell merchandise with high unit values (cars, furniture,
home appliances)
- Ex: Bar code being scanned (High Volume, Low Price Stock)

Periodic Inventory System - Answers - - Companies do NOT keep detailed inventory
records of the goods on hand throughout the period
- Companies determine the cost of goods sold ONLY AT THE END OF THE
ACCOUNTING PERIOD (periodically) --> companies then take a physical inventory
count to determine the cost of goods at hand
- Ex: Hardware Stores (Smaller Volume, Higher Prices/Ticket Items)

Periodic Inventory Steps to Determine COGS - Answers - 1) Determine the COG on
hand at the beginning of the accounting period
2) Add it to the cost of goods purchased
3) Subtract the cost of goods on hand at the end of the accounting period

Purchase $500 of merchandise on credit. Periodic inventory. - Answers - Debit
purchases (Expense account) 500
Credit accounts payable 500

Returned $150 of goods originally purchased on credit. Using Periodic inventory
approach. - Answers - Debit accounts payable 150
Credit purchase returns and allowances 150

Multiple Step Income Statement - Answers - 1) Net Sales - COGS = GROSS PROFIT

, 2) Gross Profit - Operating Expenses = INCOME from operations
3) Add OR subtract the results of activities not relating to operations to determine = NET
INCOME

Gross Profit - Answers - - (The EXCESS of net sales) / (COGS)

"Freight Out" - Answers - - Expense for DELIVERY TO CUSTOMERS

"Freight In" - Answers - - Freight costs incurred by the SELLER on outgoing
merchandise

Cost of Freight IN: Perpetual - Answers - debit inventory
credit cash

Cost of freight in: Periodic - Answers - debit freight in
credit cash

Purchase Return - Answers - - The purchaser may return the goods to the seller for
credit if the sale was made on credit, or for a cash refund if the purchase was for cash

Purchase Allowance - Answers - - Purchaser chooses to keep the merchandise if the
seller is willing to grant a reduction of the purchase price

FIFO Method - Answers - - FIRST IN, FIRST OUT
- EARLIEST GOODS purchased are the FIRST TO BE SOLD
- Sell OLDEST UNITS FIRST
- Costs of the earliest goods purchased are the first to be recognized in determining
COGS
- Under FIFO, companies determine the cost of the ending inventory by taking the unit
cost of the most recent purchase and working backward until all units of inventory have
been costed
- DURING INFLATION: Report LOWEST COGS and Lowest Income tax

LIFO Method - Answers - - LAST IN, FIRST OUT
- LATEST GOODS purchased are the FIRST TO BE SOLD
- The COSTS OF THE LATEST GOODS PURCHASED are the first to be recognized in
determining COGS
- Ending inventory is based on the prices of the OLDEST UNITS PURCHASED
- Most conservative since prices tend to go up
- Under LIFO, companies obtain the cost of the ending inventory by taking the unit cost
of the earliest goods available for sale and working forward until all units of inventory
have been costed
- DURING INFLATION: Report HIGHEST COGS and LOWEST income tax

Use FIFO when... - Answers - - older items may become perishable (grocery store
items)