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ACC 231 Exam 2 Study Guide

by: Sophia Mattera

ACC 231 Exam 2 Study Guide ACC231

Marketplace > Arizona State University > Accounting > ACC231 > ACC 231 Exam 2 Study Guide
Sophia Mattera

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These notes cover everything that will be on Exam 2!
Uses of Accounting Info I
Eric Rosano
Study Guide
Accounting, conservatism, LIFO, FIFO, periodic, perpetual, inventory systems, FOB, COGS
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This 4 page Study Guide was uploaded by Sophia Mattera on Wednesday March 2, 2016. The Study Guide belongs to ACC231 at Arizona State University taught by Eric Rosano in Spring 2016. Since its upload, it has received 66 views. For similar materials see Uses of Accounting Info I in Accounting at Arizona State University.


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Date Created: 03/02/16
ACC 231 Exam 2 Study Guide Rate of Inventory Turnover  Measures the number of times inventory is sold or used in a time period Rate of inventory turnover = cost of goods sold/ average inventory Days-sales-in-inventory  How quickly are we selling our inventory  Measures how many days it takes a company to sell its inventory  Shows liquidity Days-sales-in-inventory = Average inventory/(cost of goods sold/365 days)  Conservatism o This principle is the basis for using the lower-of-cost-or- market-rule o Understating o Being cauthous  Full disclosure o Requires that a company report enough information for outsiders to make decision o Companies must report in their statements which accounting ,method that they chose to use  LIFO o Treats the most recent/ newest purchases as the first units sold  FIFO o Assigns the most recent inventory costs to ending inventory  Consistency o Principle that prevents a company from using a different inventory costing method each year  Materiality o Principle that states significant items must conform to GAAP o A company must perform strictly proper accounting, only for items that are significant to the business’s financial statements Gross Profit = net revenues – cost of goods Earnings per share = net income/ average number of shares outstanding Gross Profit % = gross profit / net sales revenue Net Income % = net income/ net sales revenue Net cost of inventory = purchase price of inventory – discount amount Net sales revenue = sales revenue – sales returns – sales discount Net income = total revenues – total expenses Increase in retained earnings = net income – dividends Inventory turnover = cost of goods sold/ average inventory  Compound journal entry o An accounting entry in which there is more than one credit, more than one debit, or more than one of each  Income statement approach o Percentage of sales (net sales) o The profit and loss o Runs down the company’s revenues and expenses over a time period, showing the company’s net profit over time o Used to evaluate a company’s financial position and profitability ratios  Balance sheet approach o Outstanding accounts receivable o More basic snapshot of the company’s finances o Assets vs liabilities and shareholders equity at the time of the report  FIFO- “first in, first out”, uses earliest inventory costs for current sales o Generally the cost flow matches the physical flow o Costs of goods sold = oldest costs o Ending inventory = most recent costs  LIFO- “last in, first out”, uses most recent inventory costs for current sales o Most recent costs o Costs of goods sold = latest costs o Ending inventory = oldest costs o Minimizes taxes  Periodic inventory system o Not continuous, inventories are counted at the end of an accounting period, usually large inventories with inexpensive goods  Perpetual inventory system o Continuous, every transaction updates the counting of inventory, a physical count is only done annually  FOB shipping-buyer pays  FOB destination- seller pays Net income = Revenue – Expenses Gross Profit = net sales revenue – COGS Inventory turnover efficiency (asset management) Inventory turnover = COGS / average inventory  “investing” –purchasing long-term assets  Subsidiary ledgers are not required when reporting their annual statements  Purchase returns and allowances involve crediting the inventory  On a classified balance sheet, assets are listed in terms of liquidity  LIFO will yield lower net income when costs are rising


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