accounting exam 2

1) consistency: same accounting methods from period to period

2) disclosure: report enough information for outsiders to make decisions 

3: materiality: follow accouning rules for significant items

4: conservatism: excercise cautin in finacial reporting

first in first out: oldest inventory sold first, most popular 46%

last in first out: newest inventory sold first 31%

average cost: cost of inventory on hand/ number of units on hand = average cost 20%

FIFO  produces highest gross profit and highest net income

LIFO- produces lowest gross profit and lowest net income

average is in between the two 

FIFO: high income attracts investors

LIFO: lower income= less taxes

average cost: "middle ground" 

begininng inventory + net purchases = cost of goods available - ending inventory = costs of goods sold 

net purchases include: purchase discounts, returns, and freight in

beggining inventory + net purchases = costs of goods available - ending inventory = costs of goods sold 

sales - cogs= gross profit- operating expenses= net income

method to estimate ending inventory using the gross profit percent

finacial downturn, profits down

tempatation to make finacials look better

• methods
• overstate ending inventory: lower cogs increased profits
• create ficitius sales: cogs remains same increased profits