Questions and Answers of Essentials Accounting

Using the totals in the perpetual inventory record, enter the inventory transactions for May in the T-accounts given below. (The inventory purchases were on credit.) Inventory Accounts Payable Beg.
Televisions that cost $4,500 were sold in May for $5,400. Complete the following partial income statement, assuming these were the only items sold. Sales revenue Cost of sales Gross margin Income
If an entity has a p ______ l inventory, as illustrated above, finding cost of sales in a month is easy. We shall next show how to deduce cost of sales in a business that does not have this record.
Many stores, such as hardware stores, carry so many relatively low-cost items that keeping a perpetual inventory record for each separate item is not practical. When the salesperson rings up a sale,
If a hardware store does not keep a record of the cost of each item in inventory, it [can arrive at cost of sales directly / must deduce cost of sales by an indirect method].
Items in a hardware store's beginning inventory on January 1, 2011[are / are not] available for sale during 2011. Additional items purchased and placed on the shelves during 2011 [are / are not]
Therefore, the goods available for sale in a period are the sum of the b inventory plus the p during the period.
On January 1, 2011, Penfield Hardware had an inventory that cost$300,000. During 2011, it purchased $600,000 of additional merchandise.The cost of goods available for sale in 2011 was $ .
Accountants assume that goods available for sale during a period either are in inventory at the end of the period or were sold. Thus, if goods costing $900,000 were available for sale during 2011 and
At the end of each accounting period, all goods currently on hand are counted. This process is called taking a physical inventory . Since its purpose is to find the cost of the goods that were sold,
In order to determine the ending inventory of one period and the beginning inventory of the next period, how many physical inventories must be taken?
In the deduction method, goods not in inventory are assumed to have been sold. Sometimes goods are stolen, damaged, or spoiled.Therefore, the assumption that goods not in the closing inventory were
To summarize, many entities [do / do not] keep track of individual items in inventory. They find their cost of sales by the process of deduction. This requires a [perpetual / physical] inventory. An
Entities that must calculate cost of sales do so by subtracting the ending inventory from the total goods available, as in the following table: Beginning inventory. Purchases Total goods available
The same situation is shown in the following diagram. Fill in the boxes. Goods available Purchases $2,800 = Where goods are at the end of period Cost of sales Beginning inventory Ending $1,200
Complete the following table, filling in all empty boxes. Unit Total Quantity Cost Cost Beginning inventory, April 1 400 $1.00 $ Purchases, April 6 300 1.00 Purchases, April 20 300 1.00 Total goods
Lewis Fuel Company deals in fuel oil. Its inventory and purchases during April are shown in the top section of Exhibit 9. Fill in the two empty boxes in the column titled “Units.”
The “Unit Cost” column of Exhibit 9 shows that fuel oil entered the inventory at [identical / different] unit costs during April.
In Exhibit 9 fill in the first four boxes in the column headed “Total Cost.”
The problem now is this: What unit cost should we assign to the ending inventory? There are three choices: (1) we could assume that the older fuel oil was sold, leaving the [older / newer] fuel oil
In this situation, many companies make the f irst- i n, f irst- o ut( FIFO ) assumption, for financial accounting purposes only. They assume that the goods that came into the inventory [first / last]
If you applied the FIFO method to the data of Exhibit 9, you would assume that the [newer / older] fuel oil was sold during the month and that the [newer / older] fuel oil remains in the ending
The FIFO method assumes that the older units were sold during the period; therefore, the ending inventory of 600 units of fuel oil is assumed to be the most recently purchased fuel oil, namely, the
In the “FIFO Method” section of Exhibit 9, enter these amounts and calculate the ending inventory.
Earlier, you found the amount of goods available for sale to be$1,090. Enter this amount in your calculation, and subtract the ending inventory of $690 from it. The difference is the FIFO c of s ,
The FIFO method assumes that the oldest units—that is, those F I —were the first to be sold; that is, that they were the F O . The LIFO method assumes the opposite, namely, that the [oldest /
Because the LIFO method assumes that the last units purchased were the first ones to be sold, the ending inventory is assumed to consist of any remaining units in beginning inventory, plus the
In the LIFO section in Exhibit 9, enter the amount available for sale, $1,090; calculate the ending inventory; and subtract to find the cost of sales. Goods available $1,090 LIFO Method Purchase
The third method is the average-cost method . It calculates the cost of both the ending inventory and the cost of sales at the average cost per unit of the goods available. In Exhibit 9, the number
Using the average cost of $1.09 per unit, complete the averagecost section of Exhibit 9.
Most businesses try to sell their oldest goods first, so the goods that were first out are likely to be the goods [first in / last in]. The [FIFO /LIFO] method reflects this practice.
From Exhibit 9, we see that cost of sales under FIFO was$ , and under LIFO it was $ . Cost of sales was [lower / higher] under LIFO. In most companies, during periods of rising prices (i.e.,
In calculating income taxes, cost of sales is one of the items subtracted from revenue in order to find taxable income.Assume that the revenue of Lewis Fuel Company was $1,000.Disregarding other
As can be seen from the above, the higher the cost of sales, the[lower / higher] the taxable income. The lower the taxable income, the[lower / higher] will be the income tax based on that income.
Companies usually prefer to pay as low an income tax as they legally can. Therefore, they prefer the method that results in the [lower /higher] cost of sales. If prices are rising, this is usually
We have assumed so far that inventory is recorded at its cost.Suppose, however, that the fair value (i.e., market value) of the inventory falls below its original cost. The conservatism concept
For this reason, if the fair value of an item of inventory at the end of an accounting period is lower than its original cost, the item is “written down” to its f ___ v ____ . For example, for an
In “writing down” inventory, the Inventory account is [debited /credited], and Cost of Sales is [debited / credited].
If inventory is written down by $30, what would the appropriate journal entry be? Dr. Cr. ..... 30 30 30
Retail stores, wholesalers, and distributors are [merchandising /manufacturing] companies. A company that makes shoes is a [merchandising/ manufacturing] company.
A company that sells finished goods that it purchased from other vendors is a [merchandising / manufacturing] company. A company that converts raw materials into finished goods and then sells these
A merchandising company buys its goods in salable form; it receives an invoice showing the cost for each item. The costs on these invoices are the amounts used to record the additions to inventory. A
In a manufacturing company , the cost of a finished product consists of three elements:1. cost of materials used directly in that product;2. cost of labor used directly on that product;3. a fair
Some materials, such as oil for lubricating machinery, are not used directly in a product. The materials that are used directly in the product are called d ____ materials. Similarly, the labor used
Production overhead consists of all other production costs, that is, costs that are not d m or d l .
The three elements of production cost— direct labor , direct materials, and overhead —are added together to determine the total cost of the finished product. Until the product is sold, this
The process of assigning production costs to products is called cost accounting . The assignment of costs to various services in banks, schools, hotels, and all types of service organizations also
Costs are divided into two categories; they are treated differently for purposes of accounting :1. product costs —those that are associated with the production of products, and 2. period costs
Overhead costs that are classified as product costs are added to direct labor costs and direct material costs to find the total cost that is added to the Inventory account. If Scarpa Shoe Company
Costs are moved from Inventory to Cost of Sales when the products are sold. If in the year 2012 Scarpa Shoe Company sold shoes with direct material and labor costs of $1,000,000 and overhead costs
This entry included only $400,000 of overhead costs, although$480,000 of overhead costs were actually incurred in the year 2012. The Cost of Sales amount [was / was not] the same as the amount of
[Period / Product] costs reduce income in the period in which the costs were incurred. [Period / Product] costs reduce income in the period in which the product is sold, which often is a later period.
By definition, direct material and direct labor costs can be traced directly to the products for which they were incurred; the cost accounting system does this. However, production overhead, which is
The overhead rate is a rate per direct labor dollar, per direct labor hour, per machine hour, or some other measure of volume. If Scarps Shoe Company expected to incur $480,000 of production overhead
This overhead rate would be used to calculate the overhead cost of each pair of shoes worked on. If an actual pair of shoes required$10 of direct labor cost, its overhead cost would be recorded as$ .
If a certain pair of shoes required $20 of direct material cost, $15 of direct labor cost, and overhead at a cost of $1.20 per dollar of direct labor, its total cost would be $ . The Inventory cost
Although $53 is reported as the “actual” cost of this pair of shoes, it cannot represent the actual overhead cost. By definition, it [is / is not]difficult to determine the precise indirect cost
In earlier parts we described ratios and percentages that are useful in analyzing financial statements. Find the gross margin percentage from the following facts: $600,000 % Gross margin $1,50,000
A useful ratio for analyzing inventory is the inventory turnover ratio . This ratio shows how many times the inventory turned over during a year. It is found by dividing Cost of Sales for a period by
Cost of sales for 2011 was $1,000,000. Inventory on December 31, 2011, was $200,000. Calculate the inventory turnover ratio to determine how many times the inventory turned over in 2011. $ times
Slow-moving inventory ties up capital and increases the risk that the goods will become obsolete. Thus, an inventory turnover of five times is generally [better / worse] than an inventory turnover of
Look back at the calculation of the inventory turnover ratio. The turnover ratio can be decreased either by selling [more / less] goods with the same level of inventory or by having [more / less]
The depreciation of a plant asset with a cost of $10,000, no residual value, and a 5-year life, may be graphed as follows:The line showing annual depreciation expense as a function of time is
There are many ways of calculating accelerated depreciation amounts. The following table shows one of them. The asset has a depreciable cost of $15,000 and a service life of five years. Enter the
Suppose $1,000 of depreciation expense is recognized for a given year. What is the journal entry? Dr. D. Cr. A D
Suppose that the ledger showed the following account balances on January 1, 2012, and that annual depreciation expense was $1,000. Enter the amounts for depreciation in 2012. PPE Balance 10,000
The balance sheet for December 31, 2012, would include the following items. Refer to 7-48 for the amounts to enter.The income statement for 2012 would include an item: PPE. Less Book value
The table below shows the original cost, annual depreciation expense, accumulated depreciation (at year end), and book value (at year end) for a PPE asset with an original cost of $5,000, a service
Refer to the following diagram:Show how the asset would be reported on the company’s balance sheet at the end of 2013. 12/31/2011 12/31/2012 12/31/2013 $2,000 $3,000 Book value $4,000 etc. $3,000
When the asset is sold, its cost and its accumulated depreciation are removed from the accounts. For an asset that cost $40,000, had accumulated depreciation of $30,000, and sold for $12,000, the
In 2012, Todd Company mined 100,000 tons of coal. The cost of this coal was estimated to be $3 per ton. The depletion expense in 2012 was $ . How will the coal mine asset appear on the balance sheet
Three terms that refer to the writing off of an asset’s cost are:A. Depr ___ tion, which refers to (what type of?) assets.B. Dep _ tion, which refers to (what type of?)assets.C. Amor ___ tion,
Company A reports $1,000,000 of trademarks on its balance sheet, but Company B reports no such item. Which statement is more likely to be correct?1. Company A has more valuable trademarks than
When intangibles are recognized as assets, their cost is written off over their service life. For example, patents have a maximum life of approximately 17 years. In no case can the life of an
In accordance with the asset-measurement concept, intangible items such as goodwill, trademarks, and patents are not treated as assets unless [their fair value can be determined / they have been
Depletion is usually calculated by multiplying the quantity of the resource used in a period by a unit cost. If in 2011 Todd Company purchased a coal mine for $3,000,000 and estimated that the mine
The [depletion / depreciation] of a wasting asset is similar to the[depletion / depreciation] of a PPE asset. However, in accounting for depletion , the asset account is reduced directly. Therefore,
When the supply of oil in a well or coal in a mine is reduced, the asset is said to be depleted . This word, when used as the noun dep __ ion , is the name for the process of writing off the cost of
Natural resources such as coal, oil, and other minerals are called wasting assets . Of the following, circle those that are wasting assets.building natural gas freight car iron ore mine cash oil well
The book value of a PPE asset represents [what the asset can be sold for / that portion of the cost not yet expensed]. Therefore, the statement“book value reports what the asset is worth” is
Remember that in accounting for a PPE asset, original cost is[known / an estimate], service life is [known / an estimate], and residual value is [known / an estimate].
Actually, an asset may be as valuable at the end of a year as at the beginning. Depreciation expense for a given year [represents / does not represent] a decrease in the asset’s real value or
The purpose of depreciation is to [show the decline in an asset’s value / write off a fair share of the cost of the asset in each year in which it provides service].
The difference between book value and the amount actually realized from a sale of a plant asset is called a gain (or loss ) on disposition of PPE . For example, if an asset whose book value is
The calculation of book value depends on estimates of service life and residual value. Because the actual residual value probably differs from these estimates, the amount realized from the sale of a
To calculate the book value of an asset, you must subtract the from the original .Book value [does / does not] report the fair value of the asset.
After the cost of an asset has been completely written off as depreciation expense, no more depreciation is recorded, even though the asset continues to be used. In the example given above, the book
Each year, the write-off of $1,000 of the cost of the asset is recorded with the following journal entry:Dr. . . . . . . . . . .Cr. . . . . . . . . . . . . .
If the depreciation expense on this machine was $1,000 per year, we know from the above that depreciation expense has been taken for(how many?) years and that it will be taken for(how many?) more
On the balance sheet, the balance in the Accumulated Depreciation account is shown as a deduction from the original cost of the asset, and the remaining amount is called book value . For example, the
Instead, decreases in the asset amount of a PPE asset because of depreciation expense are accumulated in a separate account called Accumulated Depreciation .A decrease in an asset is always a [debit
Next, we must recognize an equal [decrease / increase] in the amount of the asset. However, accountants prefer to show the original cost of PPE assets on the balance sheet at all times. Therefore,
In accounting for depreciation, the procedure is similar. First, we recognize the appropriate amount of expense for the period. In this case the title of the expense account is D Expense.
Similarly, if a company purchased a 3-year insurance policy in advance for $9,000 on December 31, 2011, the following journal entry would be made to record Insurance Expense in 2012.Dr. . . . . . . .
For example, if an entity had a fuel oil asset of $2,000 at the beginning of March and used $500 of fuel oil during March, the entity will recognize $ of fuel oil expense for March, and it will also
In Part 5 we described how certain types of assets were converted into expenses with the passage of time. When this occurs, there is a [Dr. /Cr.] entry to the asset account, which shows the [decrease
In accelerated depreciation, more depreciation expense is reported in the early years of the asset’s service life and therefore [more / less] in the later years. The total amount of depreciation
If you want an automobile to go faster, you press down on the accelerator.Accelerated depreciation writes off the cost of an asset [faster /slower] than straight-line depreciation.
In the straight-line method, the amount of depreciation expense for a given year is found by multiplying the depreciable cost by the depreciation rate. Thus, if the depreciable cost is $7,500 and the
The percentage of cost charged off each year is called the depreciation rate. In the straight-line method, we obtain the rate by finding:1 number of years of service life For example, if an asset is

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