Chapter 6 - Inventory and Cost of Goods Sold Flashcards
Inventory
Items a company intends for sale to customers in the ordinary course of business
Valued as what it costs the company to buy the inventory
Cost of goods sold
An expense reported in the income statement and represents the cost of inventory sold
Multiple-step income statement
Shows multiple levels of profitability including gross profit, operating income, income before income taxes, and net income
Gross profit
Net revenues (or net sales)
minus cost of goods sold
Operating income
Gross profit minus
operating expenses
Income before income taxes
Operating income plus nonoperating revenues and minus nonoperating expenses
Net income
Equals all revenues minus all expenses
Inventory cost methods
Specific identification
First-in, first out (FIFO)
Last-in, first-out (LIFO)
Weighted-average cost
Specific identification
Matches each unit of inventory with its actual cost
First-in, first-out (FIFO)
Assumes first units purchased are first ones sold
Matches most companies’ inventory flow the best
Results in a higher ending inventory, lower cost of goods sold, and higher reported profits than LIFO
Last-in, first-out
Assumes last units purchased are first ones sold
Saves on taxes
Results in the lowest amounts of reported profits
Weighted-average cost
Assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items
Cost of goods available for sale/number of units available for sale
Perpetual inventory system
Follows US GAAP rules
Maintains a continual record of inventory on hand and inventory purchased and sold
Periodic inventory system
Does not continually record inventory amounts
Calculates a balance of inventory at the end of period based on physical count
Adjusts for purchases and sales of inventory
Freight-in
Cost to transport inventory to the company, which is included as part of inventory cost
Freight-out
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
Net realizable value
Estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation
Lower of cost and net realizable value
Method where companies report inventory in the balance sheet at the lower of cost and net realizable value, where net realizable value equals estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation
FOB (free on board) shipping point
Title passes when the seller ships the inventory
You have to pay for shipping
FOB (free on board) destination
Title passes when the inventory reaches the buyer’s destination
Shipping is free
Inventory turnover ratio
Shows the number of times the firm sells its average inventory balance during a reporting period
Inventory turnover ratio = COGS/average inventory
Average days in inventory
Indicates the approximate number of days the average inventory is held
365/Inventory turnover ratio
Gross profit ratio
A measure of profitability that expresses the company’s gross profit as a percentage of its total sales; the profit that a company makes after deducting the direct costs and expenses
Gross profit ratio = gross profit/net sales
