5. Inventory and cost of goods sold Flashcards
Merchandise Inventory:
The account wholesalers and retailers use to report inventory held for resale.
Raw materials:
The inventory of a manufacturer before the addition of any direct labor or manufacturing overhead.
Work in process:
The cost of unfinished products in a manufacturing company.
Finished goods
A manufacturer’s inventory that is complete and ready for sale.
Gross profit:
Sales less cost of goods sold.
Sales revenue
A representation of the inflow of assets.
Net sales
Sales revenue less sales returns and allowances and sales discounts. (Allowances: money given to the buyer as compensation for spoiled or damaged merchandise).
Cost of goods available for sale
Beginning inventory plus cost of goods purchased. The cost of a good should include all costs associated with acquiring the good. I.e. good cost (minus discounts), transportation cost and installation cost. Keep in mind not to include extra unordinary expenses to the good like e.g. insurance purchased for the good or repairs because something broke during the installation.
Cost of goods sold
Cost of goods available for sale minus ending inventory.
Purchases
An account used in a periodic inventory system to record acquisitions of merchandise.
Transportation-In
An adjunct account used to record freight costs paid by the buyer.
FOB destination point
Terms that require the seller to pay for the cost of shipping the merchandise to the buyer.
FOB shipping point
Terms that require the buyer to pay for the shipping costs.
Gross profit ratio:
Gross profit divided by net sales.
Perpetual system
A system in which the Inventory account is increased at the time of each purchase and decreased at the time of each sale.
Periodic system
A system in which the Inventory account is updated only at the end of the period.
Specific identification method
An inventory costing method that relies on matching unit costs with the actual units sold.
Weighted average cost method
An inventory costing method that assigns the same unit cost to all units available for sale during the period.
FIFO method
(first-in-first-out) An inventory costing method that assigns the most recent costs to ending inventory.
LIFO method
(last-in-last-out) An inventory method that assigns the most recent costs to cost of goods sold.
LIFO liquidation
The result of selling more units than are purchased during the period, which can have negative tax consequences if a company is using LIFO. If the company begins selling older layers of inventory bought at a lower cost, their income before taxes rises and thus also the taxes they must pay.
LIFO conformity rule
The IRS requirement that when LIFO is used on a tax return, it must also be used in reporting income to stockholders.
LIFO reserve:
The excess of the value of a company’s inventory stated at FIFO over the value stated at LIFO.
Inventory profit
The portion of the gross profit that results from holding inventory during a period of rising prices.
Replacement cost:
The current cost of a unit of inventory. (alternative to the historical cost principle. It is not accepted in accounting standards. However, it is used if the LCM rule is deemed necessary to apply).
Lower-of-cost-or-market (LCM) rule:
A conservative inventory valuation approach that is an attempt to anticipate declines in the value of inventory before its actual sale. According to this, inventory should be valued at the lowest price: either acquisition cost or current market value.
Inventory turnover ratio:
A measure of the number of times inventory is sold during the period. Found by dividing the cost of goods sold with the average inventory.
Number of days’ sales in inventory:
A measure of how long it takes to sell inventory. Found be dividing the number of days in the period by the inventory turnover ratio.
