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27 terms

Ch. 6 Inventory & Cost of Goods Sold

accounting for inventory, methods, gross profit percentage, inventory turnover, estimate, affect of errors
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average-cost method 351
Inventory costing method based on the average cost of inventory during that period. Average cost is determined by dividing the cost of goods available by the number of units available. Weighted-average method.
consignment 346
An inventory arrangement where the seller sells inventory that belongs to another party. The seller does not include consigned merchandise on hand in its balance sheet, because the seller does not own this inventory.
conservatism 359
The accounting concept by which the least favorable figures are presented in the financial statements.
consistency principle 358
A business must use the same accounting methods and procedures from period to period.
cost of goods sold 343
Cost of the inventory the business has sold to customers.
cost-of-goods-sold model 363
Formula that brings together all the inventory data for the entire accounting period: Beginning inventory + Purchases = Goods available. Then, Goods available - Ending inventory = Cost of goods sold.
debit memorandum 348
A document issued to the seller (vendor) when an item of inventory that is unwanted or damaged is returned. This document authorizes a reduction (debit) to accounts payable for the amount of the goods returned.
disclosure principle 358
A business's financial statements must report enough information for outsiders to make knowledgeable decisions about the business. The company should report relevant, reliable, and comparable information about its economic affairs.
first-in, first-out (FIFO) cost (method) 352
Inventory costing method by which the first costs into inventory are the firsts costs out to cost of goods sold. Ending inventory is based on the costs of the most recent purchases.
FOB 346
Stands for free on board, a legal term that designates the point at which title passes for goods sold. FOB shipping point means that the buyer owns, and therefore is legally obligated to pay for goods at the point of shipment, including transportation costs. In this case, the buyer owns the goods while they are in transit from the seller and must include their costs, including freight, in inventory at that point. FOB destination means that the seller pays the transportation costs, so the goods do not belong to the buyer until they reach the buyer's place of business.
gross margin 345
Another name for gross profit. Sales revenue minus cost of goods sold.
gross margin method 364
A way to estimate inventory based on rearrangement of the cost-of-goods-sold model: Beginning inventory + Net purchases = Goods available - Cost of goods sold = Ending inventory.
gross margin percentage 361
Another name for the gross profit percentage. Gross profit divided by net sales revenue.
gross profit 345
Sales revenue minus cost of goods sold.
gross profit method 364
A way to estimate inventory based on a rearrangement of the cost-of-goods-sold model: Beginning inventory + Net purchases = Goods available - Cost of goods sold = Ending inventory.
gross profit percentage 361
Gross profit divided by net sales revenue.
inventory 343
The merchandise that a company sells to customers.
inventory turnover 362
Ratio of cost goods sold to average inventory. Indicates how rapidly inventory is sold.
last-in, first-out (LIFO) cost (method) 352
Inventory costing method by which the last costs into inventory are the first costs out to cost of goods sold. This method leaves the oldest costs- those of beginning inventory and the earliest purchases of the period- in ending inventory.
lower-of-cost-or-market (LCM) rule 359
Requires that an asset be reported in the financial statements at whichever is lower- its historical cost or its market value (current replacement cost for inventory).
periodic inventory system 346
An inventory system in which the business does not keep a continuous record of the inventory on hand. Instead, at the end of the period, the business makes a physical count of the inventory on hand and applies the appropriate unit costs to determine the cost of the ending inventory.
perpetual inventory system 346
An inventory system in which the business keeps a continuous record for each inventory item to show the inventory on hand at all times.
purchase allowance 348
A decrease in the cost of purchases because the seller has granted the buyer a subtraction (an allowance) from the amount owed.
purchase discount 348
A decrease in the cost of purchases earned by making an early payment to the vendor.
purchase return 348
A decrease in the cost of purchases because the buyer returned the goods to the seller.
specific-unit-cost method 350
Inventory cost method based on the specific cost of particular units of inventory.
weighted-average method 351
Inventory costing method based on the average cost of inventory during the period. Average cost is determined by dividing the cost of goods available by the number of units available.