Accounting Methods and Ratios

Flashcards covering key accounting methods, definitions related to inventory valuation, and important financial ratios.

What does FIFO stand for?

FIFO stands for 'First In, First Out.'

What is the main characteristic of the specific identification method in accounting?

The specific identification method requires businesses to track the actual cost of each item sold.

Which accounting method allows for selling the oldest inventory first?

FIFO (First In, First Out) allows for selling the oldest inventory first.

What does LIFO stand for?

LIFO stands for 'Last In, First Out.'

In a period of rising prices, which method generally results in lower net income?

LIFO (Last In, First Out) generally results in lower net income during rising prices.

What is the effect of using LIFO on cost of goods sold and ending inventory?

Using LIFO increases cost of goods sold and decreases ending inventory.

What is the quick ratio (acid-test ratio) used to assess?

The quick ratio assesses a company's ability to pay its short-term obligations using its most liquid assets.

What is gross profit margin?

Gross profit margin is the percentage of sales revenue that exceeds the cost of goods sold.

What does the inventory turnover ratio indicate?

The inventory turnover ratio indicates how many times a company's inventory is sold and replaced over a period.

Why might a company choose to report lower net income intentionally?

A company might choose to report lower net income to lower its tax liability.