# Inventory and cost of goods sold relationship quizzes

overhead costs go into inventory (and eventually cost of goods sold). Businesses . the top of your homework, quiz, or exam at the outset since you're likely to be using it multiple .. relationship between gross profit and sales; used to estimate . Two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold and. mean you've made a profit. In this lesson, you'll learn about cost of goods sold, including where it fits on Finished Goods Inventory: Calculation & Formula. Reporting how to calculate it. A short quiz follows the lesson.

The journal entry to record a credit sales transaction when using a perpetual inventory system would include credits to the following accounts: Net sales is equal to sales less: Selling expenses include all of the following except: Which of the following accounts is not closed to Owner's Capital? Cost of goods sold.

All of the following items would be reported as other revenues and gains except: Income from operations is equal to: Which of the following is shown on both a multiple-step and a single-step income statement?

Other expenses and losses. In a classified balance sheet, merchandise inventory is reported as a: The inventory turnover is calculated by dividing: Days sales in inventory is calculated by dividing: Match the definitions to the corect answers 1.

Sales returns and a. The primary source of revenue in a allowances merchandising company. Sales less sales returns and allowances and less sales discounts. A reduction given by a seller for prompt payment of a credit sale.

Perpetual inventory system d. An inventory system under which the company keeps detailed records of the cost of each inventory purchase and sale, and the records continuously show the inventory that should be on hand. An inventory system under which the company does not keep detailed inventory records throughout the accounting period but determines the cost of goods sold only at the end of an accounting period.

Income from operations f. The excess of net sales over the cost of goods sold. Periodic inventory system g. Purchase returns and allowances from the seller's perspective 8. Freight terms indicating that the seller places the goods free on board to the buyer's place of business, and the seller pays the freight. Income from a company's principal operating activity; determined by subtracting cost of goods sold and operating expenses from net sales. FOB shipping point j.

Freight terms indicating that the seller places goods free on board the carrier, and the buyer pays the freight costs. But what does that really mean? To understand the significance of the equation, first we must explore the meaning of the three words; assets, liabilities and capital.

These terms are often used in accounting but can have very different meanings. In general, assets are something of value to the company but usually when we think of assets we think of current and fixed assets. However, in the accounting equation we should also take longterm and intangible assetsinto consideration as they all fall into the category of assets and thus add value to an entity.

Intangible assets can be hard to quantify as we are often unable to compare them with the market. Intangible assets include such things as licenses, intellectual property and goodwill which may have a specific value to the entity.

The understanding of liabilities can be even more complicated as the numerous classifications can leave even an experienced accountant scratching his head.

These classifications vary by region, but are based along the lines of: What about a ream sheets of typing paper. Is it necessary to place a value on each and every sheet of paper? Most business would answer "No" to that question. The cost of keeping that much detailed information would exceed the usefulness, or benefit, of the information. We call that the cost-benefit rule. The cost of an accounting system or any other venture should be outweighed by the benefits, or it is not cost-effective to follow that course of action.

For most companies, the Specific Identification method is far too costly and the additional information that could be gained is of little value. Most companies use a cost flow assumption. This simply means that the flow of inventory follows a certain pattern. Companies will buy merchandise in a manner consistent with the merchandise itself. For instance, a grocery store will buy only the amount of milk it can sell in a week.

Because milk spoils quickly, the store will buy small amounts each week, and make sure the milk it has for sale is the freshest milk available.

### Inventories and Cost of Goods Sold | Wyzant Resources

Further, one gallon of milk is basically the same as the next gallon with only minor differences. We say that milk is a homogeneous product. All the milk can be viewed as a single product group, that follows an almost identical weekly sales and spoilage pattern. The grocery will use a flow assumption to value its milk inventory at the end of the year. They will use FIFO, assuming that the milk on hand is the last milk that was bought during the year.

The LIFO method would assume that the milk bought in the first week of the year is the same milk on the shelf at the end of the year. Obviously year old milk will probably be coagulated into a solid, stinking block of green muck.

• Accounting Test 2

So we know that LIFO would be an incorrect flow assumption for milk. So when will the LIFO assumption will be valid?

## Inventories and Cost of Goods Sold

Let's now picture a clothing store. There are basically 4 clothing seasons: Winter, Spring, Summer and Autumn. There is a line of clothing for each season.

Further, clothing styles change each year. Except for a few items socks, handkerchiefs, belts customers will prefer to buy this year's fashions, rather than last year's fashions. Here's how that works into the LIFO method. At the end of the year the clothing store looks at its merchandise.

If their year ends in December, they have Winter clothes in the show room.

### Accounting for merchandising operations quiz | Hưng Trịnh Xuân - dayline.info

But when they look in the storage room, most of the clothes there are from earlier seasons that year. After all, you wouldn't be buying last summer's clothes in the middle of winter, would you? Most people will wait until the following year and buy clothes in style in the coming summer. Average Cost Some merchandise is nearly identical and is carried in large quantities, like lumber, nails, nuts and bolts or gasoline. If you have a tank on gasoline with say 50 gallons in it, and you add more gallons, you can't separate the first 50 gallons out from the rest of it.

It all just becomes on take with gallons of gasoline in it. So companies use the average cost method to account for things like this. If you run a gas station, your costs will change every week. You will always have some left in the tank from the week before, and the delivery truck will dump more gas in your tank at this week's prices. Gas stations use a moving average method - they take the moving average from last week, and calculate a new moving average after adding this weeks batch of gasoline to the tank.

So a moving average updates the cost frequently, and applies that particular average cost to that week's gasoline sales. Next week they will calculate a new moving average and apply it to next week's gasoline sales, etc. At one time my office was next to a company that sold nuts, bolts, screws, nails, washers and other types of small hardware items.