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ACC 131 Study Guide - Midterm Guide: Perpetual Inventory, Intangible Asset, Inventory Turnover

Course Code
ACC 131
Study Guide

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Accounting 131-005
Exam 3 Study (Chapters 6-7-8)
Please note that the exam may include some or all of the following topics. Although this study covers the majority of the exam, it
may not be all inclusive
Chapter 6 (10 conceptual multiple choice and 4 multiple choice problems)
Be able to identify what type of inventory account is used by a retailer or wholesaler and what types of inventory accounts
are used by a manufacturer
o Retailers/Wholesaler use Merchandise Inventories
o Manufacturers use Raw Materials Inventory, Work-In-Process Inventory, and Finished Goods Inventory
How is cost of goods sold calculated?
o Beginning Inventory + Purchases = Cost of Goods Available for Sale Ending Inventory = Cost of Goods Sold
When merchandise is returned to the seller and the seller uses a perpetual inventory system, what account decreases?
o Perpetual Cost of goods Sold updated with each sale (usually use).
o Decrease cash  ota eeue aout alled “ales Retus & Alloae; deease ost of goods sold;
increase inventory
Be able to interpret shipping terms (2/10, n /30; n/15; 1/15, n/45, etc.)
o 2% discount if payment is made in 10 days, otherwise full invoice is due within 30 days/ 15 days/45-days period.
Be able to identify what type of merchandise would be costed using the specific identification method
o The specific identification method determines the cost of ending inventory and the cost of goods sold based on the
identification of the actual units sold and in inventory.
o Merchandise would be items of rarity that would have a separate serial number; to be able to identify it- ex.
Be able to calculate ending inventory and cost of goods sold using FIFO, LIFO and moving average methods (perpetual
inventory system only)
What are the acceptable methods of inventory costing?
o Specific Identification
o FIFO (First in, First Out)
o LIFO (Last in, First Out)
o Average Cost
Be able to identify which inventory costing methods result in highest inventory balance, highest cost of goods sold and/or
highest net income in periods of rising or lowering prices
o Rising Purchase Prices
FIFO produces: Highest ending inventory; Highest income
LIFO produces: Highest cost of goods sold
o Falling Purchase Prices
FIFO produces: Highest cost of goods sold
LIFO produces: Highest ending inventory; Highest income
Know what lower of cost or market is
o LCM = if the market value (replacement cost) of a opa’s inventory is lower than its cost, the company reduces
the amount recorded inventory to its market value.
Know that under a perpetual inventory system the inventory account is updated after each merchandise purchase and/or
Know the formula for the inventory turnover ratio
o Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Chapter 7 (12 conceptual multiple choice, 5 multiple choice problems)
What is the definition of accumulated depreciation?
o represents the total amount of depreciation expense that has been recorded for an asset since the asset was
acquired, is reported on the balance sheet as a contra-asset.
What is the definition of an intangible asset?√√√
o Tangible assets lack physical substance.
o Patents, copyrights, trademarks, leaseholds, organization costs, franchises, and goodwill are all examples of
intangible assets.
What is the definition of depreciation?
o the process of allocating, in a systematic and rational manner, the cost of a tangible fixed asset (other than land) to
epese oe the asset’s useful life.
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