accounting exam 2

  1. Accounting princples and inventories
    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
  2. FIFO


    average cost
    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%
  3. Comparison of LIFO, FIFO, and Average Cost
    FIFO  produces highest gross profit and highest net income

    LIFO- produces lowest gross profit and lowest net income

    average is in between the two 
  4. advantages of each method
    FIFO: high income attracts investors

    LIFO: lower income= less taxes

    average cost: "middle ground" 
  5. costs of goods sold computed by formula
    begininng inventory + net purchases = cost of goods available - ending inventory = costs of goods sold 

    net purchases include: purchase discounts, returns, and freight in
  6. invetory errors
    beggining inventory + net purchases = costs of goods available - ending inventory = costs of goods sold 

    sales - cogs= gross profit- operating expenses= net income
  7. gros profit method
    method to estimate ending inventory using the gross profit percent
  8. ethical issues
    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
Card Set
accounting exam 2
chapter 6