ACCT 260 Test 2 questions with verified solutions 2024/2025

ACCT 260 Test 2

expense recognition principle - ANScost of inventory stays on balance sheet until we sell it in
order to match cost of inventory with the revenue from it

costs of inventory related transactions - ANSfreight costs, returns and allowances, discounts for
prompt payment

Gross profit= - ANSnet sales-cost of goods sold

Net Sales revenue= - ANSsales revenue less sales discounts less sales returns & allowances

income from operations (net operating income)= - ANSgross profit-operating expenses

income before income taxes= - ANSnet operating income-other revenues and gains-other
expenses and losses

net income= - ANSincome before income taxes-income tax

COGS= - ANSbeginning inventory+cost of goods purchased-ending inventory

Gross profit rate= - ANSgross profit/net sales, better when higher

profit margin ratio= - ANSnet income/net sales, affected by things like a liberal return policy

manufacturing accounts - ANSraw materials, work in process, finished goods

LIFO reserve - ANScompanies who use LIFO have to report the inventory numbers with FIFO
as well

lower of cost or market - ANSif market value drops below cost, we drop the inventory down to
the lower value

inventory turnover= - ANScost of goods sold/average inventory

average inventory= - ANS(beginning inventory-ending inventory)/2

days in inventory= - ANS365/inventory turnover

internal controls purpose - ANSto safeguard assets and ensure reliable accounting records