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products held for resale and is classified as a current asset on the balance sheet

cost of goods sold

the outflow of resources caused by the sale of inventory and is the most important expense on the income statement of companies that sell goods instead of services

gross margin (profit)

sales revenues -- cost of goods sold; indicates the extent to which the resources generated by sales can be used to pay operating expenses and provide for net income


companies (retailers/wholesalers) that purchase inventory in a finished condition and hold it for resale without further processing


merchandisers that sell directly to consumers


merchandisers that sell to other retailers


companies that buy and transform raw materials into a finished product which is then sold

raw materials inventory

basic ingredients to make a product

work-in-process inventory

the raw materials that are used in production as well as other production costs such as labor and utilities

finished goods inventory

represents the cost of the final product that is available for sale

cost of goods available for sale

the sum of beginning inentory and purchases

ending inventory

the portion of the cost of goods available for sale that remains unsold at the end of the year

perpetual inventory system

balances for inventory and cost of goods sold are continually updated with each sale or purchase of inventory

periodic inventory system

records the cost of purchases as they occur, takes a physical count of inventory at the end of the period and applies the cost of goods sold model to determine the balances of ending inventory and cost of goods sold


the cost of merchandise acquired for resale during the accounting period

purchase discounts

price reductions to encourage prompt payment by the customer

discount period

reduced payment period

purchase returns

cost of merchandise returned to suppliers

purchase allowance

the purchaser may choose to keep the merchandise if the seller is willing to gran a dudction from the purchase price


transportation costs the buyer is responsible for


transportation costs the seller is responsible for

channel stuffing

steals sales from the next period and distorts the results of the company's operations

first-in, first-out (FIFO) method

the earliest purchases are assumed to be sold first, and more recent purchases are in ending inventory

last-in, first-out (LIFO) method

the most recent purchases are the first to be sold

average cost method

allocates the cost of goods availab eofr sale between ending inventory and cost of goods sold based on a weighted average cost per unit

lower of cost or market (LCM) rule

if the mkt value of a company's inventory is lower than its cost, the company reduces the amt recoerded for the inventory to its mkt value

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