Your Accounting Skill Test

Inventory is considered a current asset on the financial statements of a business. This is because inventory represents the goods or products that a business holds for sale or intends to use in the production process. Current assets are those that are expected to be converted into cash or used up within one year. Since inventory is typically sold or used up within a year, it is classified as a current asset.

The perpetual inventory system is a method of tracking inventory in real-time. It continuously updates the inventory records to reflect the current quantity and cost of goods. Therefore, it immediately matches the cost of goods sold to all the sales made, ensuring accurate and up-to-date financial information. This system allows for better control and management of inventory as it provides a clear picture of the cost of goods sold at any given time.

The correct answer is Debit Sales returns and allowances, Credit Accounts Receivable, Debit inventory, Credit COGS. This entry is correct because it reflects the return of the product by the customer, which reduces the Accounts Receivable (as the customer no longer owes the money) and increases the Sales returns and allowances (as the product is returned). Additionally, it debits the inventory to reflect the reduction in stock and credits the COGS (Cost of Goods Sold) to adjust the cost of the returned product.

The weighted average method would most likely be used for valuing inventory of standardized materials such as oil used in making gasoline. This method calculates the average cost of inventory by taking into account the quantity and cost of each unit. Since standardized materials like oil are often purchased in large quantities at different prices, the weighted average method provides a more accurate representation of the overall cost of inventory. This method is commonly used when the unit cost of inventory fluctuates over time.

The correct answer is Cost of goods sold. Revenue less gross profit is equal to the cost of goods sold. This is because the cost of goods sold represents the direct costs incurred in producing the goods or services sold by a company. By subtracting the gross profit from the revenue, we are essentially removing the portion of revenue that covers the direct costs, leaving us with the cost of goods sold.

Periodic and Perpetual are two systems of measuring inventory. Periodic inventory system involves physically counting the inventory at the end of a specific period, while perpetual inventory system continuously updates and tracks inventory levels in real-time. Both systems have their advantages and disadvantages. The periodic system is simpler and less costly to implement but may result in inaccurate inventory records, while the perpetual system provides more accurate and up-to-date inventory information but requires more resources and technology.

The correct answer is to debit accounts payable and credit inventory. This is because the retail store purchased the product on account, which means they owe the supplier the amount of the purchase. By debiting accounts payable, the retail store is reducing the amount they owe to the supplier. Additionally, the retail store returned 20% of the product, so they need to credit inventory to reduce the value of the goods in their records.

The balance sheet contains information about a company's assets, liabilities, and shareholders' equity at a specific point in time. It provides a snapshot of the company's financial position, showing what it owns (assets), what it owes (liabilities), and the difference between the two (shareholders' equity). Revenue and expenses, on the other hand, are part of the income statement, which shows the company's financial performance over a period of time, not its financial position. Therefore, the correct answer is assets.

When a company experiences inventory shrinkage, it means that there is a loss of inventory due to theft, damage, or other reasons. The proper entry to account for this shrinkage would involve reducing the value of the inventory on the balance sheet and recording a corresponding expense on the income statement. This expense reduces the gross profit, which is the difference between sales revenue and the cost of goods sold. As a result, the gross profit will decrease. Since net income is calculated by subtracting all expenses, including the shrinkage expense, from the gross profit, it will also decrease. Therefore, the correct answer is that both gross profit and net income will decrease.

They use the specific identification method

The FIFO (First-In, First-Out) method assumes that the first items purchased are the first ones sold. In this case, 30 TVs were purchased in January at a cost of $100 each and 40 TVs were purchased in February at a cost of $150 each. If 20 TVs were sold, the FIFO method would consider the first 20 TVs to be from the January purchase, which would have a remaining value of $100 each. Therefore, the remaining value of inventory would be 10 TVs from the January purchase ($100 each) and 40 TVs from the February purchase ($150 each), totaling $7,000.

The COGS (Cost of Goods Sold) is calculated using the FIFO (First-In, First-Out) method, which means that the cost of the first units purchased is matched with the first units sold. In this case, the company purchased 25 units at $5 each and 10 units at $4 each, totaling $125 + $40 = $165. Since they sold a total of 35 units (30 + 2 + 3), the COGS would be $165.

Based on the information provided, the company counts their inventory at the end of each month. On October 1st, they had 40 units in stock. They sold 25 units on October 10th and made a profit from those sales. On October 20th, they sold 5 units but did not profit from them. On November 7th, they sold 3 units and made a huge profit. Since the inventory is counted at the end of each month, the number of units they have on November 8th would be the remaining units from October 1st (40) minus the units sold in October (25+5+3), which equals 7 units. Therefore, the correct answer is 7.

The correct journal entry to record the sale would be to debit accounts receivable for $7,000 to record the amount owed by the customer, credit sales for $7,000 to record the revenue generated from the sale, debit COGS for $2,200 to record the cost of the inventory sold, and credit inventory for $2,200 to reduce the inventory balance.

When shipping a product that was already paid by the customer in the previous month, the transaction should be recorded as Debit to accounts payable and Credit to revenue. This is because the customer has already made the payment in the previous month, so the accounts payable should be reduced by debiting it. At the same time, revenue should be recognized for the sale of the product, so it should be credited.

The given answer states that there are more than two systems to value the inventory. This implies that the options provided in the question are not exhaustive and there are additional methods of valuing inventory apart from FIFO and Specific Identification, FIFO and Weighted average, and Periodic and Perpetual. Therefore, the answer suggests that the options provided in the question are not comprehensive and there are other methods available for valuing inventory.

As a result of inventory shrinkage, both equity and inventory decrease. Inventory shrinkage refers to the loss of inventory due to theft, damage, or other reasons. This loss directly affects the value of inventory, leading to a decrease in its recorded value on the balance sheet. This decrease in inventory also affects equity, as inventory is considered an asset and a decrease in assets leads to a decrease in equity. Therefore, both equity and inventory decrease as a result of inventory shrinkage.

We do not know how many units were sold in October

The correct journal entry to record the sale would be to credit Unearned Revenue and debit Accounts Receivable. This is because the company has not yet delivered the product to the customer, so the revenue cannot be recognized as sales revenue. Instead, it is recorded as unearned revenue until the product is delivered. At the same time, the company records the amount owed to them by the customer as an accounts receivable.

The worksheet contains various financial statements and reports that are important for analyzing the financial position and performance of a company. These include the income statement, balance sheet, unadjusted trial balance, trial balance, journal, and general ledger. These documents provide a comprehensive overview of the company's revenues, expenses, assets, liabilities, and equity, as well as the transactions recorded in the accounting system. They are essential for financial analysis, decision-making, and preparing accurate financial statements.