Chapter 6: Reporting and Analyzing Inventory Flashcards
Average‐cost method
An inventory costing method that uses the weighted‐average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold.
Consigned goods
Goods held for sale by one party although ownership of the goods is retained by another party.
- Holds the goods of other parties and try to sell the good for them for a fee
Current replacement cost
The cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities.
Days in inventory
Measure of the average number of days inventory is held.
= 365/inventory turnover
Finished goods inventory
Manufactured items that are completed and ready for sale.
First‐in, first‐out (FIFO) method
An inventory costing method that assumes that the earliest goods purchased are the first to be sold.
- Ending inventory is based on the price of the most recent units purchased
- In a period of increasing prices (inflation), will yield the highest net income
- Same amount in both perpetual and periodic systems
FOB (free on board) destination/Freight Out
Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.
- Legal title of the goods remains with the seller until the goods reach the buyer
- Freight Out = ALWAYS an EXPENSE
FOB (free on board) shipping point/Freight In
Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller.
- Legal title of the goods remains with the buyer until the goods reach the seller
- Freight In = Added to Inventory
Inventory turnover
A ratio that indicates the liquidity of inventory by measuring the number of times average inventory is sold during the period; computed by dividing cost of goods sold by the average inventory during the period.
= COGS/Average Inventory
Days in inventory = 365/inventory turnover ratio
Just‐in‐time (JIT) inventory
Inventory system in which companies manufacture or purchase goods only when needed.
Last‐in, first‐out (LIFO) method
An inventory costing method that assumes that the latest units purchased are the first to be sold.
- Assumes that the latest goods purchased are the first to be sold.
- Seldom (rarely) coincides with the actual physical flow of inventory
- Ending inventory obtained by takin the unit cost of the earliest goods available for sale and working forwards until all units of inventory have been costed
- In a period of decreasing prices (deflation), will yield the highest net income
LIFO reserve
For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO.
Lower‐of‐cost‐or‐market (LCM)
A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.
- Under lower-of-cost-or-market (LCM), market is defined as current replacement cost
Raw materials
Basic goods that will be used in production but have not yet been placed in production.
Specific identification method
An actual physical‐flow costing method in which particular items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory.
