Chapter 6 Vocab Flashcards
Average days in inventory
The approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.
Cost of goods sold
Cost of the inventory that was sold during the period.
First-in, first-out method (FIFO)
Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out).
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 the cost of goods sold or as a selling expense.
Gross profit
The difference between net sales and cost of goods sold.
Gross profit ratio
A 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.
Income before income taxes
Operating income plus nonoperating revenues less nonoperating expenses.
Inventory
Items a company intends for sale to customers in the ordinary course of business.
Inventory turnover ratio
The number of times a firm sells its average inventory balance during a reporting period. It equals the cost of goods sold divided by the average inventory.
Last-in, first-out method (LIFO)
Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out).
LIFO adjustment
An adjustment used to convert a company’s inventory records maintained throughout the year on a FIFO basis to LIFO basis for preparing financial statements at the end of the year.
LIFO conformity rule
IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting.
Lower of cost and net realizable value
This is the 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.
Multiple-step income statement
An income statement that reports multiple levels of income (or profitability).
Net income
Difference between all revenues and all expenses for the period.
Net realizable value
Estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation.
Operating income
Profitability from normal operations that equals gross profit minus operating expenses.
Periodic inventory system
An 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.
Perpetual inventory system
An inventory system that maintains a continual record of inventory purchased and sold.
Specific identification method
Inventory costing method that matches or identifies each unit of inventory with its actual cost.
Weighted-average cost method
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.
