beginning balance + ending balance / 2

Income statement

1. Sales revenue is based on sale price of inventory sold
2. Cost of goods sold is based on the cost of inventory sold
3. Gross profit (gorss margin) is sales revenue less cost of goods sold

inventory on the balance sheet is based on cost

1. Does not keep a record of all goods bought and sold
2. Inventory is counted at least once a year
3. Used for inexpensive goods

1. Does not keep a record of all goods bought and sold
2. inventory is counted  at least once a year
3. used for inexpensive goods

number of units of inventory sold x cost per unit of inventory

Methods for determining per unit inventory cost:

1. Specific unit cost
2. average cost
3. FIFO
4. LIFO

LIFO:

when COGS is highest, gross profit is______

FIFO:

COGS is lowest, gross profit is _____.

Consistency Principle:

1. Same accounting principles as period to period
2. accounting changes must be disclosed

Disclosure principle:

enough info must be presented in order for stakeholders to make informed decisions

• relevant, reliable, and comparable info

Accounting conservatism:

1. anticipate or disclose all likely losses, but gains are not reported until they occur
2. Assets are recorded at lowest reasonable amount
3. Liabilities are recorded at highest reasonable amount

1. record an increase in cost of goods sold
2. recrod the reduction in inventory

profit indicator

Purchase formula:

1. Determine separate market value for each asset
2. Calculate total market value of all assets purchased
3. Divide each asset's total market value by total market value
4. Multiply percent calculated in #3 for each asset by total cash paid for the asset
5. Allocate result of #4 to that asset

• physical wear and tear of an asset
• ie: car
• Obsolescense
• ie: computer

Accumulated depreciation

** Does not mean setting aside cash to replace assets as they wear out

1. Normal balance opposite from account, credit balance to asset account
2. Paired with a normal asset account
3. Reduction in usefulness
4. book value of asset

• cost
• est. useful life
• est. residual value

• straight line
• units of production
• double declining balance

Recording Entries:

Depreciation

• Debit depreciation expense
• credit accumulated depreciation

Recording entries:

Depletion

• Debit depletion expense
• Credit accumulated depletion

Recording Entries:

Amortization

• Debit amortization expense
• Credit intangible asset

Errors:

Beginning inventory is understated: 

    -            +

Errors:

Ending inventory is understated:

+     -

Errors:

Beginning inventory is overstated:

+           -

Errors:

Ending inventory is overstated:

-           +