Ch 5 COGS & Ratios
What are the contra revenue accounts? What is their normal balance?
sales discounts and sales returns & allowances; debit balance
What is the difference between periodic and perpetual inventory systems?
Period Inventory systems determine the COGS at the end of the accounting period and perpetual inventory systems determine COGS as the inventory is sold.
What is the journal entry for a return of a sold item under the perpetual inventory method?
1. Debit Sales Returns & Allowances and Credit Cash
2. Debit Inventory and Credit COGS
What is the equation for Inventory Turnover? Does it benefit from a higher or lower number?
Inventory Turnover= COGS/ Ave. Inventory
Benefits from Higher Number
Goods held for sale by one party although ownership of the goods is retained by another party.
Consigned Goods
What is the equation for Cost of Goods Sold?
beginning inventory
+ purchases (include freight-in)
- ending inventory
= COGS
What account is used instead of inventory for the period method when the company obtains more sellable goods?
Purchases (Expense Account)
Ex: Debit purchases & Credit Cash
What are the steps to the multistep income statement?
Net Sales- COGS= GP- Operating Expenses= Income from Operations+ Other Revenues/ Gains- Other Expenses/ Losses= Income Before Taxes- Tax Provision= Net Income
What is the ratio for Days in Inventory? Does this benefit from a higher or lower number?
Days in Inventory= 365/Inventory Turnover
Benefits from a lower number
Which Costing method results in paying lower taxes during a period of deflation? What effect does this have on net income?
FIFO; decrease net income (Higher COGS and lower Inventory)
How is Gross Profit Calculated?
Net Sales- COGS= GP
What are the periodic and perpetual journal entries for freight-in?
Periodic: Debit Freight-In and Credit Cash
Perpetual: Debit Inventory and Credit Cash
Who is your favorite SI leader?
Jessica (obviously ;) )
Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.
FOB Destination
Which costing method results in paying higher taxes during a period of deflation? What effect does this have on net income?
LIFO; Increase net income (Lower COGS & Higher Inventory)
What is the ratio for Gross Profit Rate?
Gross Profit/ Net Sales= Gross Profit Rate
How is a return of purchased goods journalized using the periodic and perpetual method?
Periodic: Debit Cash and Credit Purchase returns & allowances
Perpetual: Debit Cash and Credit Inventory
What is the LIFO Reserve?
LIFO COGS- FIFO COGS
Freight terms indicating that ownership of goods passes to the buyer when the carrier accepts the goods from the seller.
FOB Shipping Point
Which Costing Method results in paying lower taxes during a period of Inflation? What effect does this have on net income?
LIFO; Decrease Net Income (Higher COGS and lower Inventory)
What is the profit margin ratio?
Net Income/ Net Sales= Profit Margin
What is the journal entry for a sale of goods under the perpetual inventory method?
1. Debit Cash and Credit Sales Revenue
2. Debit COGS and Credit Inventory
A costing method where items sold and still in inventory are costed at its particular purchase price.
Specific Identification Method
A basis whereby inventory is stated at the lower of either its cost or its market value determined by replacement cost.
Lower of Cost or Market (Conservative Approach)
Which costing method results in paying higher taxes during a period of inflation? What effect does this have on net income?
FIFO; increase net income (Lower COGS and Higher Inventory)