Chapter 6 Key Words Flashcards
approximate number of days the average inventory is held
equals 365 days divided by the inventory turnover ratio
average days inventory ratio
Cost of the inventory that was sold during the period.
cost of goods sold
An income statement that reports multiple levels of income (or profitability).
multiple-step income statement
Profitability from normal operations that equals gross profit less operating expenses.
operating income
Operating income plus nonoperating revenues less nonoperating expenses.
operating income + non operating revenues - non operating expenses
income before income taxes
Difference between all revenues and all expenses for the period.
net income
Inventory costing method that matches or identifies each unit of inventory with its actual cost.
specific identification method
Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out).
First-in, first-out (FIFO)
Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out).
Last-in, first-out (LIFO)
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.
weighted-average cost method
IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting.
LIFO conformity rule
Inventory system that maintains a continual record of inventory purchased and sold.
perpetual inventory system
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.
periodic inventory system
An adjustment used to convert a company’s own inventory records maintained throughout the year on a FIFO basis to LIFO basis for preparing financial statements at the end of the year.
LIFO Adjustment
Cost to transport inventory to the company, which is included as part of inventory cost.
Freight-in
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.
Freight-out
Estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation.
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.
lower of cost and net realizable value
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.
Cost of Goods Sold / Average Inventory
inventory turnover ratio
Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.
365 / Inventory Turnover Ratio
Average days in inventory
Measure of the amount by which the sale of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales.
gross profit / net sales
gross profit ratio
the difference between net sales and cost of goods sold
gross profit
