Term
| average days to sell inventory |
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Definition
| A measure that represents the average number of days sales for which inventory is on hand. A variant of the inventory turnover ratio, it is computed by dividing the inventory turnover ratio by the number of days in the year (365 or sometimes for simplicity, 360). (p. 516). |
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Term
| conventional retail inventory method |
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Definition
| A method of valuing ending inventory that uses only a cost ratio using markups but not markdowns, thereby approximating the lower-of-average-cost-or-market. (p. 510.) |
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Term
| cost-of-goods-sold method |
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Definition
| A method of valuing inventory in which cost of goods sold is debited for the write-down of inventory to market. As a result, the company does not report a loss in the income statement because the cost of goods sold already includes the amount of loss. (p. 498). |
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Term
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Definition
| The total goods available for sale at cost divided by the total goods available for sale at retail price. (p. 509). |
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Term
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Definition
| The amount that a company compares to cost, when using the lower-of-cost-or-market (LCM) rule. The designated market value is the middle value of three amounts: replacement cost, net realizable value, and net realizable value less a normal profit margin. (p. 496). |
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Term
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Definition
| Method of determining inventory amount, often used when it is impossible or impractical to take a physical inventory. In this method, companies compute the gross profit percentage on selling price, multiply that percentage times net sales to determine gross profit, subtract gross profit from net sales to find cost of goods sold, and subtract cost of goods sold from total goods available for sale to determine ending inventory. Also called the gross margin method. (p. 505). |
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Term
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Definition
| Measure used in the gross profit method; it represents the rate (percentage) of profit a company expects from some convenient measure, usually sales. This rate is determined by company policy and prior-period experience. (p. 506). |
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Term
| hedging (purchase commitments) |
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Definition
| The purchaser in the purchase commitment simultaneously enters into a contract in which it agrees to sell in the future the same quantity of the same (or similar) goods at a fixed price. The company holds a buy position in a purchase commitment and a sell position in a futures contract in the same commodity. (p. 504). |
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Term
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Definition
| Liquidity ratio that measures the number of times on average a company sells its inventory during the period. Computed as the cost of goods sold divided by the average inventory on hand during the period. Analysts compute average inventory from beginning and ending inventory balances. (p. 516). |
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Term
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Definition
| A method of valuing inventory in which a loss account is debited for the write-down of the inventory to market, as opposed to the cost-of-goods-sold method, which buries the loss in the Cost of Goods Sold account. (p. 498). |
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Term
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Definition
| In the lower-of-cost-or-market (LCM) rule, the lowest amount at which inventory can be reported; computed as the net realizable value less a normal profit margin. This minimum amount measures what the company can receive for the inventory and still earn a normal profit. (p. 495). |
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Term
| lower-of-cost-or-market (LCM) |
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Definition
| Rule that dictates that a company value inventory at the lower-of-cost-or-market, with market limited to an amount that is not more than net realizable value or less than net realizable value less a normal profit margin. Thus, companies abandon the historical cost principle when the revenue-producing ability of an asset drops below its original cost. (p. 495). |
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Term
| lump-sum (basket) purchase |
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Definition
| The single purchase of a group of varying units. To determine the cost for the individual assets acquired in a lump-sum purchase, the company allocates the total cost among the various assets on the basis of their relative fair values. (p. 502). |
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Term
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Definition
| Decrease in the original sales prices. (p. 509). |
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Term
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Definition
| Markdowns that are later offset by increases in the prices of goods that the retailer had marked down. (p. 510). |
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Term
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Definition
| The cost to replace an inventory item by purchase or reproduction. For a retailer, market refers to the market in which a company purchases goods, not the market in which it sells them. For a manufacturer, the term market refers to the cost to reproduce. Thus, lower-of-cost-or-market means that companies value goods at cost or cost to replace, whichever is lower. (p. 494). |
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Term
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Definition
| An additional markup of the original retail price. (p. 509). |
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Term
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Definition
| Decreases in the prices of merchandise that the retailer had marked up above the original retail price. (p. 509). |
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Term
| net realizable value (NRV) (inventories) |
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Definition
| In the lower-of-cost-or-market approach, the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal. The NRV represents the ceiling (upper limit) under LCM. (p. 495). |
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Term
| net realizable value less a normal profit margin |
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Definition
| In the lower-of-cost-or-market approach, the floor (lower limit), calculated as the NRV minus a normal profit margin. (p. 495). |
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Term
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Definition
| Agreements to buy inventory weeks, months, or years in advance. The seller generally retains title to the merchandise or materials covered in the purchase commitments. (p. 503). |
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Term
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Definition
| A method of valuing inventories that requires that a retailer keep a detailed record of (1) the total cost and retail value of goods purchased, (2) the total cost and retail value of the goods available for sale, and (3) the sales for the period. (p. 508). |
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Term
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Definition
| In the lower-of-cost-or-market (LCM) approach, the highest amount at which inventory can be reported, which is the inventorys net realizable value. The ceiling prevents overstatement of inventories and understatement of the loss in the current period. (p. 495). |
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Term
| dollar-value LIFO retail method |
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Definition
| A method of valuing ending inventory that assumes a change in the price level of inventories, which the company must eliminate so as to measure the real increase in inventory, not the dollar increase. (p. 519). |
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Term
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Definition
| A method of valuing ending inventory that assumes that the markups and markdowns apply only to the goods purchased during the current period and not to the beginning inventory. (p. 518). |
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