Chapter 6 Notes Flashcards
Inventory
Items intended for sale in business operations.
Current Asset
Asset expected to be converted to cash within a year.
Manufacturing Company
Company that produces goods for sale.
Merchandising Company
Company that sells goods without manufacturing.
Raw Materials
Basic materials used in the manufacturing process.
Work in Process
Partially finished goods in the production process.
Finished Goods
Completed products ready for sale to customers.
Cost of Goods Sold (COGS)
Cost of inventory sold during a period.
Multiple-Step Income Statement
Income statement format separating operating and non-operating activities.
Total Inventory
Sum of all inventory types available for sale.
Ending Inventory
Value of unsold inventory at period end.
Beginning Inventory
Value of inventory at the start of the period.
Purchases During the Year
Total inventory bought throughout the accounting period.
Asset in Balance Sheet
Inventory reported as a resource owned by the company.
Expense in Income Statement
Cost of goods sold recorded as an expense.
Service Companies
Businesses that provide services instead of goods.
Revenue Recognition
Recording revenue when inventory is sold.
Intel Inventory Example
Shows raw, work in process, and finished goods.
Best Buy Inventory Example
Illustrates merchandise inventories for a retailer.
Inventory Flow
Movement of inventory from manufacturing to merchandising.
Concept Check 6-1
Question assessing understanding of finished goods.
Concept Check 6-2
Question assessing understanding of cost of goods sold.
Inventory
Current asset representing unsold goods’ cost.
Cost of Goods Sold (COGS)
Expense for inventory sold during the period.
Multiple-Step Income Statement
Income statement detailing multiple profitability levels.
Gross Profit
Net revenues minus cost of goods sold.
Operating Income
Gross profit minus operating expenses.
Income Before Taxes
Operating income plus nonoperating revenues minus expenses.
Net Income
Total revenues minus total expenses.
Specific Identification
Matches each inventory unit with its actual cost.
First-in, First-out (FIFO)
Assumes earliest purchased units are sold first.
Last-in, First-out (LIFO)
Assumes latest purchased units are sold first.
Weighted-Average Cost
Each unit’s cost equals average cost of all items.
Selling Expenses
Costs related to selling products, like advertising.
General and Administrative Expenses
Overhead costs not directly tied to production.
Operating Expenses
Costs required for normal business operations.
Income Tax Expense
Taxes owed on income before tax deductions.
Gain on Sale of Investment
Profit from selling an investment asset.
Investment Income
Earnings from investments held by the company.
Interest Expense
Cost incurred from borrowed funds.
Total Available for Sale
Sum of beginning inventory and purchases.
Ending Inventory
Cost of unsold inventory at period’s end.
Units Sold
Total number of inventory items sold.
Balance Sheet
Financial statement showing assets, liabilities, equity.
Income Statement
Financial report summarizing revenues and expenses.
FIFO
First-In, First-Out; oldest inventory sold first.
LIFO
Last-In, First-Out; newest inventory sold first.
Weighted-Average Cost
Average cost of all inventory used for sales.
Cost of Goods Sold (COGS)
Total cost of inventory sold during a period.
Assumptions in Inventory Accounting
Methods do not need to match actual inventory flow.
Inventory Cost Flow Assumptions
FIFO, LIFO, and weighted-average methods for inventory.
Common Mistake in FIFO
Forgetting to include beginning inventory as first sold.
Common Mistake in LIFO
Assuming actual sales match reported inventory costs.
Cost of Goods Available for Sale
Total cost of inventory available for sale.
Beginning Inventory
Inventory carried over from previous period.
Total Purchases
Sum of all inventory purchases during the period.
Units Sold
Number of inventory units sold during the period.
Cost per Unit
Price paid for each unit of inventory.
Inventory Calculation
Method to determine ending inventory and COGS.
Mario’s Game Shop
Example used for illustrating inventory calculations.
Inventory Transactions
Records of purchases and sales of inventory.
Units Not Sold
Inventory remaining at the end of the period.
Cost of Ending Inventory
Value of inventory not sold at period’s end.
Total Units Purchased
Aggregate number of units acquired during the period.
Cost of Ending Inventory Calculation
Total cost of remaining inventory after sales.
Assumed Sales Pattern
Theoretical method of tracking inventory sales.
Inventory Reporting Flexibility
Companies can report inventory costs using assumptions.
FIFO Method Illustration
Example showing calculations using FIFO for inventory.
LIFO
Last-in, first-out inventory cost method.
Cost of Goods Sold
Total cost of inventory sold during a period.
Weighted-Average Cost
Average cost of all inventory items.
Beginning Inventory
Initial stock available at the start of a period.
Ending Inventory
Stock remaining unsold at the end of a period.
FIFO
First-in, first-out inventory cost method.
Weighted-Average Unit Cost
Total cost divided by total units available.
Total Cost
Sum of all costs associated with inventory.
Units Sold
Quantity of inventory sold during a period.
Common Mistake
Errors often made in inventory calculations.
Simple Average
Arithmetic mean of unit costs without weighting.
Total Units
Sum of all units available for sale.
Inventory Calculation
Process of determining inventory costs.
Purchase
Acquisition of inventory items.
Transaction Date
Date when inventory transactions occur.
Units Not Sold
Inventory remaining at the end of a period.
Cost Allocation
Distribution of total costs among inventory items.
Inventory Cost Flow Assumptions
Methods used to determine cost of goods sold.
Total Units Available
Total inventory units ready for sale.
Inventory Method Comparison
Analysis of different inventory valuation methods.
Weighted-Average Cost
Average cost of inventory for reporting.
LIFO Conformity Rule
Requires LIFO for tax and financial reporting.
Cost of Goods Sold
Total cost of inventory sold during period.
Gross Profit
Sales revenue minus cost of goods sold.
Balance Sheet Approach
Focus on ending inventory value for assets.
Income Statement Approach
Focus on cost of goods sold for expenses.
Tax Savings
Benefit of lower reported profits under LIFO.
Reported Profit
Net income shown on financial statements.
Rising Costs
Period when inventory prices increase.
Financial Statement Effects
Impact of inventory methods on financial reports.
Physical Flow
Actual movement of inventory through a company.
LIFO Reserve
Difference between LIFO and FIFO inventory values.
Current Cost
Cost reflecting current market prices.
Sales Revenue
Total income from sales before expenses.
Inventory Reporting Methods
Different approaches to valuing inventory.
Kroger Company
Example company illustrating inventory reporting.
Partial Balance Sheet
Snapshot of financial position at a specific time.
Inventory Cost Methods
Techniques for valuing inventory on financial statements.
Ending Inventory Value
Monetary worth of remaining inventory.
Comparison of Methods
Analysis of FIFO, LIFO, and weighted-average costs.
Consistency in Reporting
Method changes are restricted after selection.
Inventory Method Disclosure
Companies must inform stockholders of inventory methods.
LIFO
Last units purchased are first sold.
FIFO
First units purchased are first sold.
Weighted-average
Average cost of inventory is used for sales.
Net Income
Total revenue minus total expenses.
Perpetual Inventory System
Continuously updates inventory records.
Periodic Inventory System
Updates inventory records at period’s end.
Physical Inventory Count
Actual count of inventory at period’s end.
Rising Prices
Increased costs affecting inventory valuation.
Higher Reported Income
Result of FIFO during rising prices.
Lower Reported Income
Result of LIFO during rising prices.
Inventory Purchase
Acquisition of goods for resale.
Accounts Payable
Liability for purchases made on credit.
Asset
Resource owned by a company.
Liability
Obligation owed to creditors.
Inventory Transaction
Records of buying and selling inventory.
Mario’s Game Shop
Example business used for inventory transactions.
Total Revenue
Total income from sales before expenses.
Total Cost
Total expenditure on inventory purchases.
Sales Revenue
Income generated from selling goods.
Inventory Balance
Value of inventory on hand at a time.
Accounts Receivable
Money owed by customers for sales made.
Sales Revenue
Income from selling goods or services.
Cost of Goods Sold
Direct costs of producing sold inventory.
Inventory
Goods available for sale to customers.
FIFO
First-In, First-Out inventory valuation method.
LIFO
Last-In, First-Out inventory valuation method.
Perpetual Inventory System
Continuous tracking of inventory transactions.
Profit on Sale
Revenue minus cost of goods sold.
Freight Charges
Costs associated with transporting inventory.
FOB Shipping Point
Title transfers when inventory ships.
FOB Destination
Title transfers when inventory arrives.
Purchase Discounts
Price reductions for early payment by buyers.
Purchase Returns
Returning unwanted or defective inventory to seller.
Inventory Adjustment
Changes made to inventory records for accuracy.
Beginning Inventory
Value of inventory at the start of a period.
Ending Inventory
Value of inventory at the end of a period.
Sales Price
Amount charged to customers for goods sold.
Units Sold
Total quantity of inventory sold to customers.
Inventory Balance
Remaining inventory value after transactions.
LIFO Adjustment
Conversion of FIFO records to LIFO for reporting.
Debit Entry
Accounting entry that increases assets or expenses.
Credit Entry
Accounting entry that increases liabilities or equity.
Profit Calculation
Sales price minus cost of goods sold.
FOB Shipping Point
Title transfers when inventory leaves supplier’s warehouse.
Cost of Sales
Includes purchase price and shipping costs.
Perpetual Inventory System
Continuously updates inventory account with transactions.
Freight Charges
Costs added to inventory for incoming shipments.
Purchase Returns
Deducted from inventory cost when items returned.
Purchase Discounts
Reductions in inventory cost for prompt payment.
Sales Revenue
Income generated from selling goods or services.
Accounts Payable
Money owed to suppliers for purchases made.
Net Realizable Value
Estimated selling price minus selling costs.
Lower of Cost and Net Realizable Value
Inventory reported at lower of cost or NRV.
Shipping Costs
Expenses related to transporting goods to customers.
Selling Expenses
Costs incurred to sell products, not included in COGS.
Sortation Centers
Facilities for sorting products before delivery.
Delivery Centers
Locations for final product delivery to customers.
Purchase on Account
Acquisition of inventory with deferred payment.
Sales Return
Return of sold goods by customers.
Payment on Account
Settling accounts payable with cash.
Receipt on Account
Receiving cash for outstanding accounts receivable.
Freight Charges on Outgoing Shipments
Costs for shipping products to customers.
Net Realizable Value
Estimated selling price minus costs to sell.
Cost of Goods Sold
Expense representing the cost of inventory sold.
Year-End Adjusting Entry
Adjustment made to reflect inventory valuation.
Weighted-Average Cost
Average cost method for inventory valuation.
Specific Identification
Tracking individual item costs for inventory.
Inventory Adjustment
Change in inventory value based on valuation methods.
Ending Inventory
Value of unsold inventory at year-end.
Cost
Purchase price of inventory items.
Lower of Cost and NRV
Reporting inventory at the lesser of cost or NRV.
Inventory Reduction
Decreasing inventory value when NRV is lower.
Cost Adjustment
Difference between recorded cost and NRV.
Item A
Inventory item with 100 units at $4 cost.
Item B
Inventory item with 150 units at $8 cost.
Total Cost
Sum of costs for all inventory items.
Total NRV
Sum of net realizable values for inventory.
Cost Comparison
Evaluating costs against net realizable values.
Inventory Reporting
Presenting inventory values on financial statements.
Selling Price
Market price at which inventory can be sold.
Cost to Sell
Expenses incurred to sell inventory items.
Adjustment Entry Example
Debit Cost of Goods Sold, credit Inventory.
Inventory Valuation Methods
Techniques for determining inventory value.
Cost and NRV Calculation
Process of determining lower value for reporting.
Inventory Turnover Ratio
Measures how often inventory is sold in a period.
Cost of Goods Sold
Total cost of producing goods sold during a period.
Average Inventory
Mean value of inventory over a reporting period.
Average Days in Inventory
Average days inventory is held before sale.
Gross Profit Ratio
Indicates profit margin per dollar of sales.
Net Sales
Total revenue from sales after returns and discounts.
Best Buy
Retailer with high inventory turnover ratio.
Tiffany’s
Luxury retailer with low inventory turnover ratio.
Inventory Management
Process of overseeing and controlling inventory levels.
Reporting Period
Timeframe for financial reporting and analysis.
Financial Ratios
Quantitative relationships used to assess financial performance.
Calculation of Ratios
Involves using specific formulas for financial metrics.
Ending Inventory
Inventory remaining at the end of a period.
Beginning Inventory
Inventory available at the start of a period.
Average of Balances
Sum of beginning and ending balances divided by two.
Profit Margin
Percentage of sales revenue that exceeds costs.
Inventory Holding Period
Duration inventory is kept before being sold.
Financial Analysis
Evaluation of financial data to assess performance.
Turnover Rate
Frequency of inventory sales over a specific time.
Inventory Metrics
Key performance indicators related to inventory management.
Sales Efficiency
Effectiveness in converting inventory into sales.
Retail Performance
Assessment of a retailer’s sales and inventory management.
Gross Profit Ratio
Measures profit per dollar of sales.
Periodic Inventory System
Adjusts inventory periodically, not continuously.
Physical Count
Inventory assessment at reporting period’s end.
Beginning Inventory
Initial stock available at the start.
Inventory Purchases
Acquisition of stock for resale.
Sales Revenue
Total income from sold inventory.
Cost of Goods Sold
Cost incurred to produce sold goods.
Purchase Discounts
Reductions in price for early payment.
Purchase Returns
Returning unsold inventory to suppliers.
Accounts Payable
Liabilities owed to suppliers for purchases.
Accounts Receivable
Money owed by customers for sales.
Sales on Account
Sales made with deferred payment terms.
Ending Inventory
Stock remaining at the reporting period’s end.
Temporary Accounts
Accounts closed at period’s end.
Adjusting Entry
Entry to update account balances.
Inventory (Ending)
Final inventory value after adjustments.
Freight-in
Cost of shipping inventory to the business.
Purchase Discounts Recorded
Accounting for discounts received on purchases.
Inventory Transactions
Records of buying and selling inventory.
Cost of Goods Sold Calculation
Total cost of inventory sold during period.
Sales Revenue Calculation
Total revenue from inventory sales.
Inventory Adjustments
Changes made to inventory records.
Gross Profit
Revenue minus cost of goods sold.
Sales Revenue
Total income from goods sold.
Cost of Goods Sold
Direct costs of producing sold goods.
Beginning Inventory
Value of inventory at the start.
Purchases
Total cost of new inventory bought.
Freight-in
Shipping costs added to inventory.
Purchase Discounts
Reductions in purchase costs.
Purchase Returns
Goods returned to suppliers.
Multiple-Step Income Statement
Income statement with detailed revenue and expenses.
Periodic Inventory System
Inventory updates at specific intervals.
Perpetual Inventory System
Continuous tracking of inventory levels.
FIFO Method
First-in, first-out inventory valuation method.
Inventory Errors
Mistakes affecting reported inventory values.
Overstate Ending Inventory
Report higher inventory than actual.
Understate Ending Inventory
Report lower inventory than actual.
Retained Earnings
Cumulative profits retained in the business.
Cost of Goods Available for Sale
Total cost of goods ready for sale.
Asset
Resource owned by a business.
Expense
Cost incurred in earning revenue.
Balance Sheet
Financial statement showing assets and liabilities.
Income Statement
Financial statement showing revenues and expenses.
Adjusting Entry
Entry made to update account balances.
