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UNIVERSITY OF LOUISIANA AT LAFAYETTE / Accounting / ACCT 201 / What is an inventory system where companies manufacture or purchase go

What is an inventory system where companies manufacture or purchase go

What is an inventory system where companies manufacture or purchase go


Chapter 5 

What is an inventory system where companies manufacture or purchase goods only when needed for use?

Sales Revenue – Cost of Goods Sold = Gross Profit

Gross Profit – Operating Expenses = Net Income

Operating expenses: are the expenses incurred in the process of earning sales revenue  

Merchandising companies that purchase and sell directly to consumers are called retailers. (Ex. Walgreens)

Merchandising companies that sell to retailers are known as wholesalers. (Ex. United  Stationers)

Cost of goods sold: is the total cost of merchandise sold during the period

Perpetual inventory system: companies keep detailed records of the cost of each inventory  purchase and sale

Define gross profit method.

• A company determines the cost of goods sold each time a sale occurs

Periodic inventory system: companies do not keep detailed inventory records of the goods on  hand throughout the period  

• They determine the cost of goods sold only at the end of the accounting period  

Purchase invoice: indicates the total purchase price and other relevant information  • Should support each credit purchase

FOB shipping point: the buyer pays the freight cost  

FOB destination: the seller pays freight cost

Purchase allowance: a deduction made to the selling price of merchandise granted to the seller  so that the buyer will keep the merchandise  

What is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer ?

Don't forget about the age old question of We know that the longer the stimulus interval, the slower the acquisition training of avoidance behavior. why does this happen?

Purchase return: a return of goods to the buyer by the seller for a cash or credit refund

Purchase discount: a cash discount claimed by a buyer for prompt payment of a balance due • Credit terms example: 2/10, n/30, which reads “two-ten, net thirty”. This means that  the buyer may take 2% cash discount if paid within 10 days of the invoice.

Contra accounts:  

• sales discounts

• sales returns & allowances

B. Kilgen Accounting 201 1

Multi- Step income statement includes:

• sales

• cost of goods sold

• gross profit

• operating expenses

• income from operations

• other revenues and gains

• other expenses and losses  

• net income Don't forget about the age old question of What are the two products of photosynthesis?

step 1: calculate gross profit  

step 2: calculate income from operations

step 3: results of nonoperation activities  

Sales revenue – sales returns & allowances - sale discounts = Net Sales Gross profit / Net sales = Gross Profit Rate  

Net Sales – Cost of Goods Sold = Gross Profit (sales revenue is same as net sales) Operating expenses: expenses incurred in the process of earning sales revenue

• Interest revenue goes at the bottom of a multi- step income statement under “other  revenues and gains”

• Interest expense goes at the bottom of a multi-step income statement under “other  expenses and losses”  

Single-Step income statement includes: (Revenues & Expenses) If you want to learn more check out What is the most delayed album in rock ‘n’ roll history?

• Net sales

• Interest revenue  

• Cost of goods sold

• Operating expenses

• Interest expense

B. Kilgen Accounting 201 2

Classified Balance sheet order of assets:  

• Current assets  

1. Cash  

2. Accounts Receivable  

3. Inventory

4. Prepaid Insurance  

= Total Current Assets

• Property, plant, and equipment  

Beginning inventory + cost of goods purchased = Cost of goods available for sale Cost of goods available for sale – ending inventory = Cost of Goods Sold

Chapter 6 

Classifying Inventory:

• Finished goods: ready to sell

• Work in progress: stuff being made

• Raw materials: goods going to be used for production

Just in time inventory (JIT): inventory system where companies manufacture or purchase  goods only when needed for use If you want to learn more check out What is the refrigeration cycle?

Consigned goods: goods held for sale by one party although owner ship of the goods is retained  by another party  

Specific identification method: an actual physical flow costing method in which items still in  inventory are specifically costed to arrive at the total cost of the ending inventory  • Example: dealership sells car know exactly what car is sold (vin number)  If you want to learn more check out What is dhaa?

Cost Flow Assumptions:

• FIFO  


• Average-cost  

⮚ The reasons companies adopt different cost flow methods are varied but they usually  involve one of three factors… 1. Income statement effects 2. Balance sheet effects  3. Tax effects

B. Kilgen Accounting 201 3

FIFO: first in, first out  

• Assumes that the earliest goods purchased are first to be sold


• Higher ending inventory $$$ (effects balance sheet)

• Lower cost of goods sold

• Higher net income  

• Higher income taxes

LIFO: last in, first out

• Assumes that the latest goods purchased are the first to be sold If you want to learn more check out What is an example of dissociative personality disorder?


• Lower ending inventory $$$ (effects balance sheet)

• Higher cost of goods sold  

• Lower net income  

• Lowest income taxes

Average- Cost: cost of goods available for sale / total units available for sale  • Regardless of whether prices are rising or falling, average-cost produces net  income between FIFO & LIFO  

Consistency concept: dictates that a company uses the same accounting principles and  methods from year to year  

When Inventory Error:

Cost of Goods Sold is:

Net Income is:

Understates beginning inventory  



Overstates Beginning Inventory  



Understates Ending Inventory  



Overstates Ending Inventory



Lower-Cost-or-Market: a basis whereby inventory is stated at its lower of either or cost or  market value as determined by current replacement cost  

Current replacement cost: the current cost to replace an inventory item

Inventory turnover: measures the number of times on average the inventory is sold during the  period

• Cost of Goods Sold/ Average Inventory During the period= Inventory Turnover

Days in inventory: measures the average number of days’ inventory is help

• 365/ inventory turnover= days in inventory

B. Kilgen Accounting 201 4

Moving average method: a new average is computed after each purchase  • Cost of Goods Available for Sale/ Units on Hand= Moving Average Method

Gross Profit Method: a method for estimating the cost of the ending inventory by applying a  gross profit rate to net sales and subtracting estimated cost of goods sold from cost of goods  available for sale  

Retail inventory method: a method for estimating the cost of the ending inventory by applying  a cost-to-retail ratio to the ending inventory at retail  

Chapter 7 

Fraud: is a dishonest act by an employee that results in personal benefit to the employee at a  cost to the employer

                                         Fraud triangle:


Financial Pressure Rationalization

The Sarbanes-Oxley Act: regulations passed by congress to try to reduce unethical corporate  behavior  

• Early 200’s  

• All publicly traded U.S. corporations are required to maintain an adequate  system of internal control

Internal Controls: is a process designed to provide reasonable assurance regarding the  achievement of objects related to operations reporting and compliance  

Two main functions of internal controls:

• Safeguard assets  

• Enhance the reliability of accounting records  

5 primary components of internal controls:

• Control Environment  

• Risk Assessment  

B. Kilgen Accounting 201 5

• Control Activities

• Information and Communication  

• Monitoring  

Principles of Control Activities:  

• Establishment of Responsibility  

• Segregation of Duties

• Documentation Procedures

• Physical Controls

• Independent Internal Verification

• Human Resource Controls  

Establishment of Responsibility: one person per task  

Segregation of Duties: divide up duties

1. Different individuals should be responsible for related activities  

2. The responsibility of record keeping for an asset should be separate from the  physical custody of that asset  

Documentation Procedures: when possible use pre-numbered documents • Require signatures

Physical Controls: when you use physical means to protect assets (ex: safes, locked  warehouses, passcodes, alarms, cameras, time clocks)

Independent Internal Verification:  

1. Companies should verify records periodically or on surprise basis  

2. An employee who is independent of the personnel responsible for the information  should make the verification  

3. Discrepancies and exceptions should be reported to a management level that can  take appropriate corrective actions  

(ex: each month the assets on hand are compared to the accounting records by an internal  auditor)

Human Resource Controls:  

1. Bond employees that handle cash  

2. Rotate employees’ duties and require employees to take vacation  

3. Conduct thorough back ground checks  

Bonding: obtaining insurance protection against theft by employees  

Voucher system: network of approvals by authorized individuals acting independently to insure  that all disbursements by check are proper

B. Kilgen Accounting 201 6

Voucher: is an authorization form prepared for each payment in a voucher system  

Bank reconciliation: the process of comparing the banks balance of an account with the  companies’ balance and explaining any differences to make them agree

Bank statement: a statement received monthly from the bank that shows the depositor’s bank  transactions and balances

Deposits in transit: deposits recorded by the depositor that have not been recoded by the bank  

NSF Check: a check that is not paid by a bank because of insufficient funds in a customer’s bank  account  

Outstanding checks: checks issued and recorded by the company that have not been paid by  the bank  

Electronic funds transfer (EFT): a disbursement system that uses wire, telephone, telegraph or  computer to transfer cash from one location to another

Cash: resources that consist of coins, currency, check, money orders, and money on hand or on  deposit in a bank  

Bank Side:  

• Deposits in transactions

• Outstanding checks

• Banks errors

Book Side:

• Notes collected by banks

• NSK checks

• Bank charges  

• Company errors  

Cash equivalents: are short-term highly liquid investments that are both: 1. Readily convertible to known amounts of cash

2. So near their maturity that their market value is relatively insensitive to changes in  interest rates. Generally, only investments with maturity of three months or less  qualify under this definition.

Restricted cash: cash that is not available for general use but rather is restricted for a special  purpose

B. Kilgen Accounting 201 7

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