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average-cost method (weighted-average method)

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. Also called weighted average method


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.


the accounting concept by which the least favorable figures are presented in the dinancial statements

consistency principle

a business must use the same accounting methods and procedures from period to period

cost of goods sold

cost of the inventorry the business has sold to customers

cost of goods sold model

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

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

a business's financial statements must report enough information for otusiders to make knowledgable decisions about the business. The company should report relevant, reliable, and comaprable information about its economic affairs

first in, first out (FIFO) cost (method)

inventory costing method by which the fist costs into inventory are the first costs out to cost of goods sold. Ending inventory is based on the costs of the most recent purchases

FOB (free on board)

a legal term that designates the point at which title passes for goods solds. FOB shipping point means that the buyer owns, and therefore is legally obligated to pay for goods at the point og the shipment, including transportation costs. In this case, the buyer owns the goods while they are in transit from the seller and mus 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 profit

sales revenue minus cost of goods sold

gross profit method (gross margin method)

a way to estiamte inventory based on the rearrangement of the cost of goods sold model: beginning inventory + net purchases = goods available - cost of goods sold = ending inventory.

gross profit percentage (gross profit percentage)

gross profit divided by net sales revenue.


merchandise tat a company sells to customers

inventory turnover

ratio of cost of goods sold to average inventory. Indicates how rapidly inventory is sold.

last in, first out (LIFO) cost (method)

inventory costing method by whichc 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 rule (LCM)

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

inventory system in which the business does not keep a continuous record of the inventory on hand. Instead, tat the end of the period, the business makes a physical count of the inventory on hand and applies the appriopate unit costs to determine the cost of the ending inventory

perpetual inventory system

inventory system in which the business keeps a continous record for each inventory item to show the inventory on hand at all times

purchase allowance

decrease in the cost of purchases because the seller has granted the buyer a subtraction (an allowance) from the amount owed

purchase discount

decrease in the cost of purchases earned by making an early payment to the vendor

purchase return

a decrease in the cost of purchases because the buyer returned the goods to the seller

specific-unit-cost method

inventory cost method based on the specific cost of particular units of inventory

When applying lower-of-cost-or market, "market" generally means

replacement cost

During a period of rising prices, the inventory method that will yield the highest net income and asset value is:

FIFO method

Application of the lower-of-cost-of-market rule often results in a....

lower inventory value

Equation to find Cost of goods sold

beginning inventory + net purchases - ending inventory =

Equation to find Purchases

Ending inventory + Cost of goods sold - Beginning inventory =

Equation to find Net Purchases

Purchases - Purchase returns and allowances + Freight in =

Equation to find Gross Profit Percentage

(Net sales - Cost of goods sold) / Net Sales =

Equation to find Inventory Turnover

Cost of goods sold / Average inventory =

Equation to find Average Inventory

(Beginning inventory + Ending inventory) / 2 =

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