Chapter 6- Inventory

gross profit fromala

Sales- gross profit (sales *percentage)= COGS

Gost of goods availnle for -COGS

When do companies take physicl inventory?

when is buinses is closed or slow

A major advantage of the FIFO method is that in a period of inflation, the costs allocated to ending inventory will

approximate their current cost (good blance sheet effect)

A major shortcoming of the LIFO method is that in a period of inflation the costs allocated to ending inventory may be

understated in terms of cost (balance sheet may show understated cost of inventory)

Both inventory and net income are higher when companies use — (fifo/lifo) in a period of inflation

fifo

— results in the lowest income taxes (because of lower income before tax) during times of rising costs

LIFO

he cost flow method that often parallels the actual physical flow of merchandise is the: a. : FIFO method. b. LIFO method. c. average cost method. d. gross profit method. LO 2

Fifo

Cost of goods sold forumla=

Begging INventory+ Cost of Goods Purchased- Ending Inventory

When begg inventory is understated, COGS is —— and Net income is ——

understated, overstated

When begg inventory is overstated. COGS is —- and netincome is

overstated , understated

When ending inventory is understated, COGS is —— net income is

overstated, understaded

When endinf inventory is overstated, COGS is— and netincome is —-

understaed, overstated

An error in ending inventory of the current period will have a —- , over the two years, the total net income is —- because the errors offset each other

reverse effect on net income of the next accounting period, correct

Overstated Ending Inventory effect on the balance sheet

Assets= overstated

Liabilities= No effect

Stock holder’s Equity=Overstated

Understated Ending Inventory effect on the balance sheet

Assets= understated

Liabilities= No effect

Stock holder’s Equity=undersated