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Accounting QuizThree

TermDefinition
Weighted Average Unit Cost Method Part One This is an inventory vaulation method that assumes that the value of inventory sold is an average of all costs....so that you take the total inventory value.
Weighted Average Unit Cost Method Part Two (or in other words the cost of goods available for sale) and divide it by the amount of inventory, which will result in an averaged number which you will assume is the value of each item.
Day Sales in Inventory measures the number of days on average inventory is in stock. (i.e. is on the shelf before it is sold)
Consigned Goods Product/service that is resold by a third party store. For example, you give your unused electronics to a store to sell on your behalf. thus the consignor gives these goods to a consignee to sell... (consignor keeps ownership)
Specific Identification Method Part One this is a method of finding out ending inventory cost. It requires a detailed physical count, so that the company knows exactly how many of each goods bought on specific dates remained at year end inventory.
Specific Identification Method Part Two With this method we know exactly which items of inventory has been sold (no assumptions have to be made). This is the inventory valuation method that best follows the matching principle as it matches the exact COGS to Sales. (example:
Specific Identification Method Example One used in selling large items in which cost is easily identified .....such as a car dealership)
Safeguard To Control Assets Part One Physical, mechanical, and electronic controls relate primarily to the safeguarding of assets and enhancing accuracy and reliability of the accounting records.
Safeguard To Control Assets Part Two This can be as simple as locking up supplies, and as complicated as implementing computer security systems.This is an INTERNAL CONTROL mechanism that helps prevent fraud.
Segregation of Duties (This is an INTERNAL CONTROL mechanism that helps prevent fraud) The person who looks after assets should not also maintain the records for those assets. The work of one employee should provide a reliable basis for evaluating the work of another employee
LIFO Last in First Out. This is an inventory valuation that assumes the latest goods purchased are the first to sell out. The ending inventory (cost)/(COGS) is obtained by calculating the total cost of the recent purchases of inventory.
Gross Profit Margin Method of Estimating Inventory Part One One method of estimating ending inventory that uses the following formulas: Estimated Gross Profit =( Net Sales)x(Gross Profit Margin Ratio)
Gross Profit Margin Method of Estimating Inventory Part Two Estimated COGS = Net Sales - Estimated Gross Profit Estimated Ending Inventory= Cost of Goods Available for Sale - Estimated COGS
Retail Method of Estimating Inventory Part One This is one method to estimate inventory (ending Inventory), where you apply the cost-to-retail ratio to the ending inventory at retail to estimate ending inventory.
Retail Method of Estimating Inventory Part Two Thus .....estimated ending inventory = (cost to retail ratio)X (ending inventory at retail)
Authorization (This is an INTERNAL CONTROL mechanism that helps prevent fraud.) Authorization is an internal control method, compartamentalizing responsibility for authority and increased control: giving only one person responsibility for each task (to maximize control)
Authorization Example Only small number of people should have power to sign company checks
Documentation Procedures (This is an INTERNAL CONTROL mechanism that helps prevent fraud.) Documents should provide evidence that transactions and events have occurred. Missing documents must be accounted for. If there is a mistake on an invoice and it needs to be voided, there must be some procedure to report it.
Cost to retail ratio This ratio is used in the retail method of estimating the ending inventory..... under the retail method the cost ratio is the cost of goods available divided by the retail value of the goods available :
Cost to Retail Ratio Example Cost of Goods Available For Sale at Cost/Cost of Goods Available for Sale at Retail x 100
Cosignee The person or company who are responsible for the goods but do not have ownership. The party that sells the goods not the party that has shipped goods to your place of business to sell.
Consignor Ownership remains with the shipper of the goods until the goods are actually sold to a customer. The consignor is usually the party that shipped the goods...not the party that sold the goods.
Inventory Valuation Part One Inventory valuation is the dollar amount associated with the items contained in a company's inventory .
Inventory Valuation Part Two to add... an inventory valuation method would be the manner in which you identify this dollar amount. Examples of Inventory Valuation Methods... Specific ID and cost flow assumption methods such as LIFO, FIFO, and Average cost
Net Realizable Value Also known as the Market value (in the Lower of Cost and Market). It is the estimated selling price in the ordinary course of business.
Inventory Shrinkage Part One When you do a physical inventory count, that it is lower than your expected amount (or in a perpetual system than the amount that is in your Merchandise Inventory account), this loss of inventory is inventory shrinkage.
Inventory Shrinkage Part Two inventory shrinkage is generally a result of: Theft falling from the truck missing. Etc
Estimated Ending Inventory at Retail Ending Inventory at Retail = Cost of Goods Available for Sale at Retail – Net Sales
Cost Flow Assumption Part One cost flow assumption - methods used to determine the cost of goods sold (COGS) and ending inventory... that require us to make an assumption of which goods have been sold in the fiscal period...
Cost Flow Assumption Part Two we would choose the cost flow assumption that best matches the flow of inventory leaving our business (to best follow the matching principle as COGS is an expense).
LCM Part One this stands for Lower of Cost and Market. It is the lowest cost of the item when comparing it between current market value and the value it was purchased for.
LCM Part Two we use this to write down the loss of value of inventory when value of inventory falls significantly, such that its value is lower than its cost. The value of inventory after adjustment would be listed at the Lower of Cost and Market.
LCM Part Three This goes against the cost principle, but follows the principle of conservatism, as to not overstate assets and net income.
FIFO Fifo stands "first in first out". its a cost flow assumption which assumes the first inventory that comes in will go out first.
Cost to retail ratio This method is estimating the ending inventory under the retail method the cost ratio is the cost of goods available divided by the retail value of the goods available :
Estimated Gross Profit Gross Profit Margin x Net Sales
Goods in Transit Goods that are on board a public carrier such as railway, airline, trucking, or shipping company at the end of the accounting period
Internal Control consists of the policies and procedures adopted within a business in order to: use resources efficiently; prevent and detect errors and irregularities; safeguard its assets; maintain reliable accounting records.
Estimated Cost of Goods Sold (COGS) Net Sales – Estimated Gross Profit
Inventory Turnover Ratio measures the number of times on average, inventory is sold (turned over) during the period
Gross Profit Margin Ratio The gross profit margin ratio shows gross profit as a percentage of net sales. Gross Profit Margin = Gross Profit / Net Sales
Created by: SinthuGotCash