Ch. 5 Flashcards
Finished inventory
Inventory held by retailers and wholesalers
2 types of inventory held by businesses?
Finished inventory, materials inventory
Materials inventory
Inventory held by manufacturers
3 types of inventory costs borne by manufacturers?
Direct materials
Direct labor
Manufacturing overhead
3 distinct forms of inventory for a manufacturer?
Raw materials
Work in process
Finished goods
Merchandise inventory
Account wholesalers and retailers use to report inventory held for resale
Raw materials AKA Direct materials
Inventory of a manufacturer before addition of any direct labor or manufacturing overhead
Direct labor
Amounts paid to workers to manufacture product
Manufacturing overhead
Includes all other costs that relate to manufacturing process
But can’t be matched directly to specific units of out put
Ex. Depreciation of factory building, salary of supervisor
Work in process AKA work in progress
Cost of unfinished products in manufacturing company
Finished goods
Manufacturers inventory that is complete
And ready for sale
Who uses a single cost to purchase inventory held for sale?
Resellers
Gross profit AKA Gross margin
Gross profit = net sales - cost of goods sold
Net sales
Net sales = sales revenue - sales returns and allowances
- sales discounts
Sales revenue AKA sales
Representation of inflow of assets
Sales returns and allowances
Contra-revenue account used to record refunds to customers
And reductions of their accounts
Sales discounts
Contra-revenue account used to record discounts given to customers for early payment of their accounts
Cost of goods available for sale
Cost of goods available for sale = beginning inventory +
Cost of goods purchased
Cost of goods sold
COGS = cost of goods available for sale - ending inventory
Perpetual system
System in which inventory account is increased
at time of each purchase and decreased at time
of each sale
Periodic system
System in which inventory account is updated
Only at end of the period
Transportation-in AKA Freight-in
Adjunct account used to record freight costs paid by buyer
Purchases
Account used in periodic inventory system to record
Acquisitions of merchandise
Purchase returns and allowances
Contra-purchases account used in periodic inventory system
When refund is received from supplier or reduction
Is given in balance owed to supplier
Purchase Discounts
Contra-purchase account used to record reductions
In purchase price for early payment to supplier
FOB destination point
Terms that require seller to pay cost of
Shipping merchandise to buyer
FOB shipping point
Terms that require buyer to pay for shipping costs
Cost of goods purchased
Cost of goods purchased = net purchases + transportation-in
Gross profit ratio, calculate, indicates 2 things?
Gross profit ratio = gross profit/net sales
Important measure of profitability,
indicates company’s ability to cover operating expenses
4 common costs associated with inventory?
Freight costs
Cost of insurance
Cost of storing inventory
Taxes paid
Specific identification method
Inventory costing method that relies on matching
Unit costs with actual units sold
Weighted average cost method
Inventory costing method that assigns same unit
Cost to all units available for sale during period
Weighted avg. cost = cost goods avail for sale/ units avail. for sale
First in first out method (FIFO)
Inventory costing method that assigns most recent costs
To ending inventory
Last in First out method (LIFO)
Inventory method that assigns the most recent costs
To cost of goods sold
Inventory turnover ratio
Measure number of times inventory is sold over the period
Inventory turnover ratio = cost of goods sold/avg. inventory
Number of days’ sales in inventory
Measure of how long it takes to sell inventory
days’ sales in inventory = # days in period/invent. turnover ratio
