Accounting 201Chapter 06 Key Words

Question 2

Average days in inventory

Answer 2

Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.

Question 3

Cost of goods sold

Answer 3

Cost of the inventory that was sold during the period.

Question 4

Finished goods

Answer 4

Inventory items for which the manufacturing process is complete.

Question 5

First-in, first-out method (FIFO)

Answer 5

Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out).

Question 6

Freight-in

Answer 6

Cost to transport inventory to the company, which is included as part of inventory cost.

Question 7

Freight-out

Answer 7

Cost of freight on shipments to customers, which is included in the income statement either as part of cost of goods sold or as a selling expense.

Question 8

Gross profit

Answer 8

The difference between sales revenue and cost of goods sold.

Question 9

Gross profit ratio

Answer 9

Measure of the amount by which the sale price of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales.

Question 10

Income before income taxes

Answer 10

Operating income plus nonoperating revenues less nonoperating expenses.

Question 11

Inventory

Answer 11

Items a company intends for sale to customers.

Question 12

Inventory turnover ratio

Answer 12

The number of times a firm sells its average inventory balance during a reporting period. It equals cost of goods sold divided by average inventory.

Question 13

Last-in, first-out method (LIFO)

Answer 13

Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out).

Question 14

LIFO adjustment

Answer 14

An adjustment used to convert a company’s own inventory records maintained on a FIFO basis to LIFO basis for preparing financial statements.

Question 15

LIFO conformity rule

Answer 15

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting.

Question 16

Lower-of-cost-or-market (LCM) method

Answer 16

Method where companies report inventory in the balance sheet at the lower of cost or market value, where market value equals replacement cost.

Question 17

Multiple-step income statement

Answer 17

An income statement that reports multiple levels of income (or profitability).

Question 18

Net income

Answer 18

Difference between revenues and expenses. Difference between all revenues and all expenses for the period.

Question 19

Operating income

Answer 19

Profitability from normal operations that equals gross profit less operating expenses.

Question 20

Periodic inventory system

Answer 20

Inventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand.

Question 21

Perpetual inventory system

Answer 21

Inventory system that maintains a continual record of inventory purchased and sold.

Question 22

Raw materials

Answer 22

Components that will become part of the finished product but have not yet been used in production.

Question 23

Replacement cost

Answer 23

The cost to replace an inventory item in its identical form.

Question 24

Specific identification method

Answer 24

Inventory costing method that matches or identifies each unit of inventory with its actual cost.

Question 25

Weighted-average cost method

Answer 25

Inventory costing method that assumes both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale.

Question 26

Work-in-process

Answer 26

Products that have started the production process but are not yet complete at the end of the period.