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ACCT20200 Chapter Notes - Chapter 6: Earnings Before Interest And Taxes, Balance Sheet, Income Statement

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Ch. 6: Inventory and Costs of Goods sold
● Inventory: Items company intends for sale two customers in the ordinary course of
business.
○ Inventory is a current asset, cost of goods sold is an expense
● Ending inventory is often the largest asset in the balance sheet and cost of goods sold is the
largest expense in the income statement
● Manufacturing companies: produce the inventory of spaced-out rather than buying them
in finished form from suppliers
○ Raw materials: inventory includes the cost of components that will become part of
the finished product but we haven't used in production
○ Work-in-process:The products that have been started in the production process but
are not yet complete at the end of the period.
○ Finished goods:Items for which the manufacturing process is complete
● Merchandising companies: Purchase finished products from manufacturers and they sell the
product to the customers
○ Wholesalers:resale inventory to retail companies or two professional users
○ Retailers: purchase inventory from manufacturers or wholesalers and then sell this
inventory to end users
● Service companies record revenues when providing services to customers. Merchandising and
manufacturing companies record revenues when selling inventory to customers.
● Ending inventory is inventory not sold. Inventory sold is the cost of the goods sold expense
● Multiple-step income statement: the income statement reports multiple levels of income or profit.
Separating revenues and expenses in two different types provides a better way of determining the
source of profitability
○ Gross profit: net revenues or net sales minus cost of goods sold
○ Net sales: net amount of revenues
○ Operating income: gross profit reduced by operating expenses.
■ Measures profitability of normal operations.
○ Operating expenses: selling, general and administrative expenses, depreciation, salaries,
rent, utilities, etc.
○ Nonoperating revenues and expenses: other income = positive, other expense = negative.
■ Arise from activities that aren’t part of the company’s primary operations
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Related Questions

1.) When products held in inventory are sold:

A.)Cost of Goods Sold is credited.

B.)Work in Process Inventory is credited.

C.)Finished Goods Inventory is credited.

D.)Finished Goods Inventory is debited.

2.)Since manufacturing costs (direct materials, direct labor,and overhead) are incurred in the process of manufacturing units ofproduct, these costs are credited t

A.) The Direct Materials Inventory, Direct Labor, and ManufacturingOverhead accounts respectively.
B.) Liability accounts.
C.) The Work in Process Inventory account.
D.) The Cost of Goods Sold account.

3.)Management accounting systems are designed to assistorganizations in the performance of all of the following functionsexcept:

A.) The assignment of decision-making authority over companyassets.
B.) Planning and decision-making.
C.) Monitoring, evaluating, and rewarding performance.
D.) The preparation of income tax returns.

4.)In a schedule of cost of finished goods manufactured, thefigure for total manufacturing costs:

A.) May be less than the cost of direct materials used.
B.) May be less than the direct labor costs assigned toproduction.
C.) May be less than the manufacturing overhead applied toproduction.
D.) May be less than the cost of finished goodsmanufactured.

5.) When a manufacturing company purchases raw materials orcomponent parts to be used in manufacturing finished goods, thesecosts are initially debited to:

A.) Expense accounts.
B.) Raw Materials Inventory.
C.) Finished Goods Inventory.
D.) Manufacturing Overhead.

6.) The wages paid to employees working directly on a company'sproducts would be shown as a:

A.) Credit to Direct Labor.
B.) Debit to Direct Labor.
C.) Credit to Work in Process.
D.) Debit to Manufacturing Overhead.

7.) Amounts credited to the Work in Process inventory accountmay best be described as:

A.) The cost of finished goods manufactured.
B.) Total manufacturing costs charged to production.
C.) The cost of goods sold.
D.) Direct materials purchased, direct labor costs paid, andpayments for items classified as manufacturing overhead.
25.
Products that are in the process of being manufactured but are notyet complete are called:
A) Raw materials inventory.
B) Conversion costs.
C) Cost of goods sold.
D) Goods in process inventory.
E) Finished goods inventory.

21.
Cycle efficiency:
A) Is the ratio of value-added time to total cycle time.
B) Is the ratio of value-added time to non-value-added time.
C) Is the ratio of process time to total cycle time.
D) Cannot be used in conjunction with other analytical tools.
E) Is the same as the cycle time.


18.
In August, one of the processing departments at Knepp Corporationhad beginning work in process inventory of $17,000 and ending workin process inventory of $13,000. During the month, $178,000 ofcosts were added to production.

In the department's cost reconciliation report for August, the costof units transferred out of the department would be:
A) $182,000
B) $195,000
C) $169,000
D) $165,000
19.
In February, one of the processing departments at WhisenhuntCorporation had beginning work in process inventory of $35,000 andending work in process inventory of $11,000. During the month, thecost of units transferred out from the department was $410,000. Inthe department's cost reconciliation report for February, the totalcost to be accounted for would be:
A) $46,000
B) $807,000
C) $842,000
D) $421,000

16.
A financial report that summarizes the amounts and types of coststhat were incurred in the manufacturing process during the periodis a:
A) Materiality statement.
B) Managerial statement.
C) Manufacturing statement.
D) Merchandise statement.
E) Monetary statement.

7.
In a process costing system, manufacturing overhead applied isusually recorded as a debit to:
A) Finished goods.
B) Work in process.
C) Manufacturing overhead.
D) Cost of goods sold.

Estimated overhead and direct labor costs for the year were$250,000 and $125,000, respectively. During the year, actualoverhead was $248,000 and actual direct labor cost was $123,000.The entry to close the over- or under-applied overhead at year-end,assuming an immaterial amount, would include:
A) A debit to Cost of Goods Sold for $2,000.
B) A debit to Factory Overhead for $2,000.
C) A credit to Finished Goods Inventory for $2,000.
D) A debit to Goods in Process Inventory for $2,000.
E) A credit to Cost of Goods Sold for $2,000.

Dazzle, Inc. produces beads for jewelry making use. Thefollowing information summarizes production operations and salesactivities for June. The journal entry to record June sales is:

Direct materials used $87,000
Direct labor used 160,000
Predetermined overhead rate(based on direct labor) 155%
Goods transferred to finishedgoods 432,000
Cost of goods sold 444,000
Credit sales 810,000

a.Debit Accounts Receivable $810,000; credit Cost of Goods Sold$810,000.

b.Debit Accounts Receivable $810,000; credit Sales $366,000;credit Finished Goods Inventory $444,000.

c.Debit Cost of Goods Sold $444,000; credit Sales $444,000.

d.Debit Finished Goods Inventory $444,000; debit Sales $810,000;credit Accounts Receivable $810,000; credit Cost of Goods Sold$444,000.

e.Debit Accounts Receivable $810,000; credit Sales $810,000;debit Cost of Goods Sold $444,000; credit Finished Goods Inventory$444,000.

2. A process cost summary is amanagerial accounting report that describes all but which of thefollowing:

a.The gross profit earned on the sale of products.

b.The equivalent units of production by the department.

c.How the costs were assigned to the output.

d.Physical transfers for a department.

e.The costs charged to a department.

3. During January, the productiondepartment of a process operations system completed and transferredto finished goods a total of 78,000 units. At the end of January,9,000 additional units were in process in the production departmentand were 65% complete with respect to labor. The beginninginventory included labor cost of $37,100 and the productiondepartment incurred direct labor cost of $294,300 during January.Compute the direct labor cost per equivalent unit for thedepartment using the weighted-average method.

a.$6.34.

b.$3.77.

c.$3.51.

d.$4.25.

e.$3.95.

4.Which of the following is thebest explanation for why it is necessary to calculate equivalentunits of production in a process costing environment?

a.In most manufacturing environments, it is not possible toconduct a physical count of units.

b.Companies often use a combination of a process costing and joborder costing systems.

c.In most process costing systems, direct materials are added atthe beginning of the process while conversion costs are addedevenly throughout the manufacturing process.

d.All of the work to make a unit 100% complete and ready to moveto the next stage of production or to finished goods inventory maynot have been completed in a single time period.

e.In most cases, there is no difference between physical unitsand equivalent units of production.

5.The following refers to unitsprocessed by a breakfast cereal maker in August. Compute the totalequivalent units of production with respect to conversion for Julyusing the weighted-average inventory method.


Tons of Product 		Percentof
Conversion Added
Beginning Work in Process 230,000 60%
Goods started 570,000 100%
Goods completed 620,000 100%
Ending Work in Process 180,000 70%

a.758,000

b.800,000

c.620,000

d.746,000

e.884,000

6.During December, the productiondepartment of a process operations system completed and transferredto finished goods a total of 65,000 units of product. At the end ofMarch, 15,000 additional units were in process in the productiondepartment and were 80% complete with respect to materials. Thebeginning inventory included materials cost of $57,500 and theproduction department incurred direct materials cost of $183,000during December. Compute the direct materials cost per equivalentunit for the department using the weighted-averagemethod.

a.$3.70.

b.$2.38.

c.$2.82.

d.$3.12.

e.$4.79.