Chapter 6 Pt 1
How is ending inventory calculated?
CGAS - COGS = EI where CGAS = Beg. Balance Inventory + Purchases
False; companies can use different methods for different items.
Also remember 1) that companies can change methods infrequently if it improves the accuracy of financial statements and 2) that LIFO is allowed under GAAP but NOT under IFRS
The purpose of managerial accounting is to...
provide useful information in
1. determining the costs of an organization's products/services
2. planning future activities
3. comparing actual results to planned results
What is the difference between vertical and horizontal analysis?
Vertical - each item in a financial statement is expressed as a percentage of a base amount of the same period (i.e. income statement accounts expressed as a percentage of net sales)
Horizontal - analyzes trends in a company's financial data over time, calculates both amount and percentage change in account balances
What are the five levels of the multi-step income statement?
1. Sales Revenue
(COGS)
2. Gross Profit
(Operating Expenses)
3. Operating Income
+ other income (expenses)
4. Pre-tax income
(Income tax expense)
5. Net Income
What's the difference between a perpetual and a periodic inventory system?
Perpetual- most common, continuous records inventory purchased/sold, COGS adjusted every time goods are sold/returned
Periodic- does not continuously record inventory amounts, inventory balance calculated/adjusted at the end of each reporting period based on physical count
Which of the following are not direct costs involved in making a car:
a. hourly wages paid to assembly line workers
b. tires
c. factory supervisor salaries
d. benefits for hourly employees
e. factory rent
f. factory utilities
c, e, f
If current year net sales were $5 million and prior year net sales were $7 million, what is the percent change in net sales from year 1 to year 2?
% increase/decrease = current year amount - prior-year amount / prior-year amount
= (5 mil - 7 mil)/ 7 mil = 28.57% decrease
What are the four methods of inventory allowed under GAAP?
1. FIFO
2. LIFO
3. Weighted Average
4. Specific Identification
Explain the difference between FOB shipping point and FOB destination
FOB shipping point - title transfers when the inventory leaves the supplier
FOB destination - title transfers when inventory reaches the purchaser
Give an example of fixed, variable, and mixed costs
Fixed - rent, manager salaries
Variable - hourly wages, raw materials
Mixed (fixed + variable component)- sales commission, utilities
Which ratio measures how many times receivables are collected during the year?
Receivables turnover ratio
True or False: During Periods of declining costs, the inventory method in which the oldest inventory is sold first results in higher pre-tax income
False; when costs are declining FIFO (oldest/first-in sold first) results in lower pre-tax income than LIFO
EX if the following purchases are made and two units are sold:
1/1 1 unit @ $3
1/2 1 unit @ $2
1/3 1 unit @ $1
FIFO: COGS = 5, higher COGS = lower income
LIFO: COGS = 3, lower COGS = higher income
On July 1, Costco purchased inventory for $10,000 on terms 2/15, n/60. Calculate the total payment amount and record the journal entries if payment is made on July 3.
10,000 * .02 = 200 discount, total payment $9,800
July 1: DR Inventory 10000, CR Accounts Payable 10000
July 3: DR AP, CR Cash 9800, CR Inventory 200
Prepare a contribution margin income statement if sales are $10,000, variable expenses are $2,000, and fixed expenses are $3,000.
Sales 10,000
VC (2,000)
CM 8,000
FC (3,000)
NI 5,000
Consider the following accounts balances for Costco:
Cash 20,000
Accounts Receivable 6,000
Equipment (net) 24,000
Accounts Payable 4,000
8 yr. Notes Payable 13,000
Retained Earnings 33,000
Calculate Costco's current ratio and cash as a % of total assets.
current ratio = current assets / current liabilities
= (20 + 6) / 4 = 6.5
Cash as a % of total assets = 20 / 50 = 40%
Consider the following purchases:
10 units on 3/1 @ $8/ea.
15 units on 4/1 @ $11/ea.
13 units on 4/1 @ $9
This company uses LIFO for reporting purposes. If 31 units are sold for $20/ea., what is their gross profit? What is their ending inventory?
Sales revenue = 31 * $20 = $620
CGOS = (13*$9) + (15*$11) + (3*$8) = $306
CGAS = (13*9) + (15*$11) + (10*8) = $362
Gross profit = 620 - 306 = $314
Ending Inventory = 362 - 306 = $56
If sales revenue = $10,000, gross profit ratio = .25, net sales = $9,000, and average inventory = $6,000, calculate
1) Inventory turnover ratio
2) Average days in inventory
1) gross profit ratio = gross profit/net sales, .25 = GP/9,000, GP = 9,000*.25 or 2,250
Inventory turnover = COGS/average inventory, GP = Sales Rev - COGS, 2,250=10,000 - COGS, COGS = 10,000 - 2,250 or 7,750
SO turnover = 7,750/6,000 = 1.29
2) Average days in inventory = 365/inventory turnover ratio = 365/1.29 = 282.94 days
Fresh Market sold 8,000 rotisserie chickens for $40,000. Variable costs were $5,000 and fixed costs were $7,000.
Calculate 1) breakeven point and 2) quantity if target profit is $70,000
Breakeven point: CM/unit = FC
CM/unit = (sales - variable costs)/units sold = (40,000 - 5,000)/8,000=4.375
4.375 * quantity = 7,000, Q = 7,000/4.375 = 1,600 units to break even
Target profit: CM/unit = FC + target profit
4.375 * quantity = 7,000 + 70,000, Q = 77,000/4.375 = 17,600 units
Will you pass 210?
YES!!! You've got this!